THE 

ARTHUR  YOUNG 

ACCOUNTING 

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By  the  Author  of  This  Voliune 


ACCOUNTING  THEORY  AND  PRACTICE 

By  Roy  B.  Kester 

A  college  text  in  three  volumes,  constituting  a  carefully  de- 
veloped progressive  explanation  and  application  of  the  principles 
of  accounting. 

FUNDAMENTALS  OF  ACCOUNTING 

By  S.  B.  KooPMAN  and  Roy  B.  Kester 

A  text  in  two  volumes  for  the  first  two  years  of  high  school. 

DEPRECIATION 

By  Roy  B.  Kester 

A  Ronograph  (No.  28).  A  discussion  of  the  causes  of  deprecia- 
tion, the  factors  determining  its  rate,  and  method  of  calculating 
and  recording  it. 

The  Ronald  Press  Company 
New  York 


ACCOUNTING 

THEORY    AND    PRACTICE 


BY 
ROY  B.  KESTER,  Ph.D. 

CERTIFIED    PUBLIC   ACCOUN  lANT;   PROFESSOR   OF   ACCOUNTING, 
SCHOOL   OF   BUSINESS,  COLUMBIA    UNIVERSITY 

AND 

COLLABORATORS 


VOLUME  III 

(THIRD  YEAR) 


»     5        »    >    3 


THE   RONALD   PRESS   COMPANY 

NEW  YORK 


87069 


Copyright,  192 1,  by 
The  Ronald  Press  Company 


All  Rights  Reserved 
5 


BvLS.  Admia, 
Library 


HF 

K48a 
U.3 


To  My  Co-laborers 

WHOSE  INTEREST  IN  ACCOUNTANCY  EDUCATION  AND 
WHOSE  DEVOTION  TO  THE  FUTURE  WELFARE  OF  THEIR 
PROFESSION     HAVE     MADE     THIS     VOLUME     POSSIBLE 


PREFACE 

0 

The  present  volume  completes  the  series  of  texts  covering  the 
general  field  of  accounting  which  the  author  planned  at  the  time 
of  the  appearance  of  his  first  volume.  The  special  subjects  of 
cost  accounting  and  auditing,  although  essential  links  in  the 
training  for  professional  accounting,  have  not  been  given  a  place 
,     in  this  series,  which  is  limited  to  the  general  field.     Volumes  I 

^    and  II  present  the  fundamental  principles  on  which  the  science 
V  rests  and  give  a  thorough  treatment  of  its  larger  problems,  par- 
ticularly those  closely  related  to  the  fields  of  finance,  business 
organization  and  management,  and  law.    As  the  author  views 
the  problem  of  accountancy  education,  there  remains  for  sound 

^1     training  in  this  general  field,  a  need  for  the  student  to  see  how  the 

^  principles  which  he  has  been  studying  as  related  to  ideal  abstract 
situations,  are  applied  to  actual  conditions. 

Business  organizations  may  be  divided  into  several  large 
groups  or  types,  the  chief  of  which  are:  (i)  financial  institutions, 

^^  (2)  manufacturing  businesses,  (3)  trading  businesses,  (4)  those 

dealing  in  or  concerned  with  services,  professional  and  other,  and 

;  (5)  the  organizations  for  carrying  on  the  business  functions  of 

"t  governmental  bodies,  state,  county,  municipal,  etc.  For  the 
proper  rounding  out  of  his  training  in  accoimting,  the  student 
needs  an  understanding  of  the  application  of  general  accounting 
principles,  not  only  to  these  main  groups  or  types  of  business, 
but  at  least  to  a  few  of  the  individual  units  comprising  each 
type. 

Throughout  the  volumes  of  the  series  the  view  has  been  em- 
phasized that  merely  theoretic  principles  held  in  abstraction  and 
not  submitted  to  the  testing  of  use  in  practice  have  little  or  no 
place  in  the  scheme  of  education  for  a  calling  as  intensely  practi- 
cal as  accounting.    The  major  purpose  of  the  present  volume  is 


^ 


VI  PREFACE 

the  study  of  accounting  principles  as  definitely  applied  in  various 
businesses.  The  student  who  has  not  had  training  in  such  study 
is  often  in  danger  of  being  narrow,  arbitrary,  and  unyielding  in 
his  views  of  the  function  of  accounting  and  of  methods  of  keeping 
the  records  of  business.  He  too  often  does  not  realize  that  a 
so-called  principle  is  valueless  unless  it  works  in  practice.  Only 
by  viewing  principles  and  laws  at  work  in  dififerent  situations 
and  under  varying  conditions  can  he  have  a  really  comprehen- 
sive grasp  of  those  principles.  Only  by  being  familiar  with  their 
applications  to  given  situations  can  he  apply  them  with  con- 
fidence to  new  conditions.  A  knowledge  of  the  adaptations  of 
fundamental  accounting  principles  to  meet  certain  practical 
requirements  is  an  essential  part  of  the  education  for  the  practice 
of  accountancy. 

In  no  sense  is  the  present  volume  a  "system"  book,  no  eflfort 
being  made  to  set  forth  a  complete  system  of  accounting  for  any 
business.  Forms  are  used  only  where  necessary  to  show  the  way 
in  which  basic  principles  are  applied  and  results  accomplished. 
Only  the  main  accounting  problems  are  treated  in  each  case. 
Each  chapter,  however,  is  so  developed  as  to  give  the  student  a 
sufficient  background  to  grasp  the  accounting  features  of  the 
business  and  to  appreciate  its  main  management  and  administra- 
tive problems,  as  an  aid  in  the  solution  of  which,  after  all,  any 
system  of  records  must  justify  itself. 

This  volume  would  not  have  been  possible  without  the  collec- 
tive effort  of  many  individuals.  Aside  from  the  intrinsic  value 
of  the  various  chapters,  there  is  an  additional  value  in  a 
co-operative  undertaking  of  this  kind,  in  that  the  reader  is 
brought  in  intimate  contact  with  the  diverse  views  of  many  able 
writers.  After  a  two  years'  grounding  in  principles,  the  student 
should  be  able  to  examine  and  judge  for  himself  the  mooted 
points  of  accounting  theory. 

For  use  in  the  classroom,  the  book  is  designed  along  the  same 
lines  as  the  other  volumes  in  the  series.  The  practice  work  for 
the  student  is  found  in  Appendices  A  and  B.    Appendix  A  con- 


PREFACE  VU 

tains  problems  directly  related  to  the  chapters  of  the  text.  Ap- 
pendix B  presents  a  miscellaneous  collection  of  accounting 
problems  which  have  been  set  at  various  professional  examina- 
tions. Sufficient  material  is  provided  to  cover  a  full  year's  work 
of  at  least  thirty  weeks. 

In  the  production  of  the  present  volume,  my  own  work  has 
been  largely  of  an  editorial  nature  in  suggesting  the  broad  lines 
for  the  development  of  the  various  chapters  and  of  the  accom- 
panying problem  material.  Without  a  group  of  collaborators 
who  were  willing  to  give  hearty  co-operation  in  shaping  their 
material  to  fit  the  general  scheme,  the  work  would  have  been 
well-nigh  impossible. 

In  the  preparation  of  the  three  chapters  credited  to  myself  I  am 
under  obligation  for  much  assistance.  John  Jaffe,  John  Abney, 
and  Henry  W.  Sweeney,  graduate  students,  gathered  most  of  the 
material,  and  Mr.  Jaffe  has  given  valuable  assistance  in  the 
preparation  of  the  problem  material,  in  editorial  suggestions, 
and  in  reading  the  proof.  For  courtesies  extended,  acknowledg- 
ment is  due  the  Williamsburg  and  the  Emigrant  Savings  banks. 
Acknowledgment  is  also  due  to  "Flinty  Green,"  the  author  of  a 
master's  thesis  on  coffee,  from  which  I  have  drawn  freely  through 
the  courtesy  of  my  friend  Professor  John  T.  Madden  of  New 
York  University.  Charles  F.  Rittenhouse  and  Mr.  Leo  Green- 
dlinger  have  kindly  allowed  the  use  of  problems  published  by 
them.  I  am  under  particular  obligation  to  Mr.  Ernest  B.  Hor- 
wath  of  Horwath  and  Horwath,  specialists  in  hotel  accounting, 
for  many  suggestions  and  much  material  furnished  by  him.  For 
the  editorial  work  on  the  volume,  acknowledgment  should  be 
made  of  the  able  assistance  of  Mr.  Eskholme  Wade. 

Roy  B.  Kester 
New  York  City 
November  15,  1921 


CONTENTS 


Chapter  Page 

I    Organization  for  Accounting  Control         .         .         .        i 
By  James  O.  McKinsey,  M.A.,  LL.B, 

Member  of  Columbia  Staff  of  Instructors  in  Accounting  (1920-1921); 
Certified  Public  Accountant;  Member  of  firm,  Fraser  and  Torbet; 
Author  of  "Bookkeeping  and  Accounting";  Joint  Author  with  A.  C. 
Hodge  of  "  Principles  of  Accounting" ;  Assistant  Professor  of  Accounting 
University  of  Chicago 

II    Analysis  of  Borrowers'  Financial  Statements    .         .       i8 
By  Charles  M.  Neubauer 

Member  of  Columbia  Staff  of  Instructors  in  Accounting;  Certified 
Public  Accountant;  With  Byrnes  and  Baker;  Formerly  Chief  of  the 
Accounting  Division  of  the  Credit  Department,  Irving  National  Bank 

III  Foreign  Exchange  Accounting 49 

By  Frederick  W.  Scholz,  M.A. 

Member  of  Columbia  Staff  of  Instructors  in  Accounting ;  With  Lybrand, 
Ross  Brothers  and  Montgomery 

IV  Savings  Bank  Accounting     .         .         .         .         .  —    .     loi 

By  Roy  B.  Kester 

V    Bituminous  Coal  Mine  Accounting         .         .         .         .137 
By  William  J.  Thompson,  B.C.S. 

Certified  Public  Accountant;  General  Auditor,  Colorado  and  Utah 
Coal  Company,  Colony  Coal  Company,  and  Harris  Coal  Company 

VI    Precious  Metal  Mine  Accounting        ....     202 
By  Reginald  Thomas,  B.C.S. 

Certified  Public  Accountant;   Member  of  firm,  Brotherton,  Thomas 
and  Company;  Formerly  Chief  Accountant  of  Jupiter-St.  Clair  Mining 
Company 

VII    Ranch  Cost  Accounting  226 

By  Clem  W.  Collins,  B.C.S. 

Certified  Public  Accountant;  Member  of  firm,  Collins,  Morris,  Keller 
and  Company;  Profcjsor  of  Accounting,  University  of  Denver 


X  CONTENTS 

Chapter  Page 

VIII     Accounting  for  Malleable  Iron  Industry     .         .         .275 

By  Nina  M.  MiUer,  M.S. 

Instructor  in  Accounting,  School  of  Business,  Columbia  University; 
Formerly  Cashier  and  Chief  Clerk  Belle  City  Malleable  Iron 
Company 

IX    Contractors'  Accounts 316 

By  Thomas  W.  Byrnes,  B.C.S. 
and  K.  Lanneau  Baker,  B.C.S. 

Members  of  Columbia  Staff  of  Instructors  in  Accounting;  Certified 
Public  Accountants;  Members  of  firm,  Byrnes  and  Baker 

X    Accounting  in  the  Coffee  Trade  ....    345 

By  Roy  B.  Kester 

XI    Principles  of  Department  Store  Accounting       .         .     396 
By  P.  E.  Bacas,  B.C.S. 

Member  of  Columbia  Stafif  of  Instructors  in  Accounting  (19 19-1920): 
Certified    Public   Accountant;   With    Lybrand,   Ross    Brothers   and 
Montgomery;  Instructor  in  Auditing,   New  York  University  School 
of  Commerce,  Accounts  and  Finance 

XII    The  Organization  and  Accounts  of  a  Public  Account- 
ant's Office 423 

By  Albin  Russman 

Member  of  Columbia  Staff  of  Instructors  in  Accounting;  Formerly 
with  Marwick,  Mitchell  and  Company;  Practicing  Public  Accountant 

XIII  Accounting  for  an  Advertising  Agency       .         .         .    465 

By  T.  L.  WooLHOUSE 

Member  of  Columbia  Staff  of  Instructors  in  Accounting;  Certified 

Public  Accountant;    Formerly   with    Lybrand,    Ross    Brothers    and 

Montgomery;  Treasurer  of  the  Morse  International  Agency 

XIV  Hotel  Accounting 488 

By  Roy  B.  Kester 

XV    Municipal  Accounting 523 

By  James  L.  Dohr,  M.S. 

Member  of  Columbia  Staff  of  Instructors  in  Accounting;  Certified 
Public  Accountant;  With  Thompson  and  Worley;  Formerly  Auditor, 
'.  Municipal  Accounts  Division,  Wisconsin  Tax  Commission 

Appendix  A — Practice  Work  for  Student — First  Half- Year   .     587 
Appendix  B — Practice  Work  for  Student — Second  Half- Year    647 


FORMS  AND  CHARTS 


Chapter  I — Organization  for  Accounting  Control 


Form 

1.  Journal  Voucher         .... 

2.  Chart  Illustrating  Accounting  Organization 


Page 

8 
i6 


Chapter  II — Analysis  of  Borrowers*  Financial  Statements 


Financial  Statement  Submitted  to  Bank  by  Borrower 


20,  22,  24,  26 


Bank's  Comparison  Sheet  of  Borrower's  Assets  and  Liabilities         .       28 
Bank's  Sheet  for  Comparison  of  Income  and  Capital  Account  .       29 

Bank's  Comparison  Sheet — Borrower's  Excess  Quick  Assets,  Excess 
Slow  Assets,  and  Net  Worth    .  .  .  .  .  .  .31 

Borrower's  Statement  Sheet  of  Assets  and   Liabilities,  with  Com- 
parisons ..........       32 


Chapter  III — Foreign  Exchange  Accounting 

1.  Position  Sheet  ....... 

2.  Bill  for  Sales  of  Cable  Exchange 

3.  Authorization  Sheets  for  Exchange  Sold  and  Bought 

4.  Cable  Confirmation  Sent  to  Correspondent 

5.  Foreign  Exchange  Sales  Journal 

6.  Foreign  Exchange  Purchase  Journal 

7.  Letter  of  Advice  for  Drafts  Drawn  on  Correspondent 

8.  (a)  Nostro  Ledger  Account  for  Hand  Entry 
(b)  Nostro  Ledger  Account  for  Machine  Entry     . 

9.  Reconciliation  Form  for  Foreign  Accounts    . 
ID.  (a)  Debit  Note  Form  to  Foreign  Correspondent  for  Discount 

(b)  Debit  Note  Form  to  Foreign  Correspondent  for  Acceptance 

11.  Notification  of  Granting  Letter  of  Credit      .... 

12.  Acceptance  Register  ........ 

13.  Acceptance  Maturity  Record 

14.  Notification  of  Cover  against  Acceptances    .... 


55 
65 
66 
67 
69 
69 
74 
77 
77 
82 

83 
83 
89 
91 
92 

93 


Chapter  IV — Savings  Bank  Accounting 

1.  Organization  of  a  Mutual  Savings  Bank     .  .  .  . 

2.  Chart  Showing  Route  of  Draft  and  Deposit  in  Savings  Bank 


107 
112 


Chapter  V — Bituminous  Coal  Mine  Accounting 


1.  Coal  Sales  Register 

2.  Pay-RoU  Sheet 


162,  163 
164,  165 


Xll 


FORMS  AND  CHARTS 


Chapter  VI — Precious  Metal  Mine  Accounting 
Form  Page 

1.  Labor  Distribution  Sheet    .  .  .  .  .  .  .  .2x8 

2.  Perpetual  Inventory  of  Materials  and  Supplies      .  .  .  .219 

Chapter  VII — Ranch  Cost  Accounting 
Forms  and  charts  covered  in  text. 


Chapter  VIII — Accounting  for  Malleable  Iron  Industry 

1.  (a)  Chart  Showing  Processes  of  Malleable  Iron  Manufacture.  .     278 
(b)  Chart  Showing  Functional  Organization  of  a  Malleable  Iron 

Foundry  .........     279 

2.  Individual  Labor  Slip  .  .  .  .  .  .  .  .288 

3.  Monthly  Cost  Summary     ........     293 

4.  Data  for  Estimated  Costs  .......     299 

5.  Stores  Ledger    ..........     309 

6.  Superintendent's  Individual  Car  Record        .....     309 

7.  Superintendent's  Melting  Order  .  .  .  .  .  .  .310 

8.  Daily  Summary  of  Metals  Melted        .  .  .  .  .  .311 

9.  (a)  Monthly  Summary  of  Pig  Iron  Contracts  vs.  Unfilled  Orders         312 
(b)  Unfilled  Orders  for  Malleable  Iron  Castings  .  .  .312 

10.  Summary  of  Losses  in  Manufacture  .  .  .         ,         .313 


Chapter  IX — Contractors'  Accounts 

1 .  Organization  Chart  of  General  Contracting  Business 

2.  Job  Record  Card 

3.  Voucher  Register  and  Journal 

4.  Contract  Cost  Ledger 

5.  Subcontractors  Ledger 

6.  Requisition  for  Payment     . 

7.  Requisition  for  Payment  Register 

8.  Architect's  Certificate 

9.  Accounts  Receivable  (Owners)  Ledger 


•  324 

•  327 
332,  333 

•  334 
.  336 

•  337 
-  338 

•  339 
.  341 


Chapter  X — Accounting  in  the  Coffee  Trade 

1 .  Letter  of  Credit  Book  .... 

2.  Importation  Register 

3.  Soot  Purchases  Register      .... 

4.  Accounts  Receivable  Book 

5.  Stock  Book        ...... 

6.  Weekly  Stock  Report  for  Administrative  Purposes 

7.  Bought  Sheet     ...... 

8.  vSold  Sheet 

9.  Recapitulation  Statement  .... 

10.  Option  Day  Book       ..... 

1 1 .  Option  Ledger  ..... 

12.  Options  Analysis  Ledger     .... 

13.  Option  Month  Book  ..... 

14.  Exchanj^e  Delivery  Book    .... 


•  351 

•  353 

•  355 
■  359 

360,  361 

.  362 

•  369 

•  369 

•  371 

•  373 

•  375 

•  377 
.  382 

•  5?5 


FORMS  AND  CHARTS 


XIU 


Chapter  XI — Principles  of  Department  Store  Accounting 
Forms  and  charts  covered  in -text. 


Chapter  XII — The  Organization  and  Accounts  of  a  Public  Ac- 
countant's Office 
Form 

1.  Oi^anization  Chart  of  a  Firm  of  Public  Accountants 

2.  Engagements  List      ....... 

3.  Location  Sheet  ....... 

4.  Audit  Program  ....... 

5.  Loose-Leaf  Record  of  Reports  Delivered 

6.  Accountant's  Time  Report  for  Each  Client 

7.  Accountant's  Weekly  Stunmary  Time  and  Expense  Report 

8.  Summarized  and  Detailed  Time  Report 

9.  Summary  of  Time  Spent  on  Engagement 

10.  Office  Time  Report    .... 

1 1 .  Engagement  Cost  Account . 

12.  Service  and  Expense  Journal 

13.  Clients  Ledger  .... 


Page 

•  429 

•  436 

•  437 
440,  441 

•  445 

•  449 

•  450 

•  451 

•  452 

•  453 

•  455 
461 

•  463 


Chapter  XIII — Accounting  for  an  Advertising  Agency 


A  Typical  Advertising  Agency  Organization  Chart 

Cash  Book  (debit  and  credit  side) 

Requisition  Job  Order 

Order  Form 

Checking  Card 

Contract  Sheet 

Publishers'  Ledger 

Copy  Schedule  for  Newspaper  Publications 

Copy  Schedule  for  Monthly  Publications 


•  467 

•  472 
474.  475 
476,  477 

■  478 
.  480 
.  482 
.  482 
484,  485 


Chapter  XIV — Hotel  Accounting 

1 .  Chart  Showing  Organization  and  Responsibilities  of  Hotel  Employees  491 

2.  Room  Count  Book     .........  494 

3.  Restaurant  Cashier's  Report        .......  495 

4.  Guests  Ledger  Card  ........  497 

5.  Guests  Ledger  Sheet  .         .         .         .         .         .         .         .  499 

6.  Earnings  Book  .........  503 

7.  Daily  Hotel  Sheet 506,  507 


Chapter  XV — Municipal  Accounting 


I.  Tax  Roll  or  Tax  Ledger      .... 

.          .                 546,547 

2.  Utility  Ledger  ...... 

•       548,549 

3.  Bond  Register  for  10- Year  Bonds 

•       550,  551 

4.  Voucher  Register        ..... 

.     552 

5.  Pay-In  Voucher          ..... 

•      553.554 

6.  Real  Estate  Tax  Receipt    .... 

.     555 

xiv  FORMS  AND  CHARTS 

Form  Page 

7.  (a)  Order  Check  (Pay-Roll) 557 

(b)  Order  Check  (General) 558 

8.  Purchase  Order 559 

9.  Invoice     ..........       560,  561 

10.  (a)  Chart  Showing  General  Revenue  Receipts  of  the  State  For  Fiscal 

Year  Ending  Tune  30,  19 — 584 

(b)  Chart  Showing  Disbursements  of  the  State  for  Current  Expense 

and  Outlay  For  Fiscal  Year  Ending  June  30, 19 —  .         .         .     585 


Accounting — Theory  and   Practice 


CHAPTER   I 

ORGANIZATION  FOR  ACCOUNTING  CONTROL 
By  James  O.  McKinsey 

Need  for  Accounting  Organization 

The  management  of  a  business  necessitates  the  making  of 
plans,  the  formulation  of  judgments,  and  the  issuing  of  instruc- 
tions. To  be  trustworthy  these  plans,  judgments,  and  instruc- 
tions must  be  based  on  accurate  and  comprehensive  information, 
and  this  information  must  be  obtained  in  la,rge  part  from  the 
accounting  and  statistical  records.  Not  only  must  such  records 
be  kept,  but  the  information  they  contain  must  be  analyzed, 
presented,  and  interpreted,  if  proper  judgments  are  to  be  made 
and  proper  action  taken.  To  this  end,  an  organization  must  be 
set  up  and  made  responsible  for  its  accomplishment. 

It  is  the  purpose  of  this  chapter  to  discuss  the  nature  of  this 
organization  and  the  method  by  which  it  performs  its  task.  It 
should,  however,  be  understood  that  though  functions  and  duties 
may  be  the  same  in  similar  businesses — and  some  accounting 
functions  are  common  to  all  businesses — the  plan  of  organization 
whereby  the  functions  are  carried  out  may  and  generally  does  vary 
in  its  details,  due  in  part  to  variations  in  custom  and  in  part  to  varia- 
tions in  conditions .  Therefore,  the  apportionment  of  duties  among 
officials  as  here  to  be  outlined  is  merely  tentative  and  suggestive. 

The  Accounting  Organization 

The  accounting  organization  in  any  particular  business  must 
depend  to  a  considerable  extent  upon  the  size  of  the  concern  and 


2         ACCOUNTING— THEORY  AND  PRACTICE 

the  nature  of  its  operations.  In  a  large  business  there  may  be  a 
controller  who  in  addition  to  exercising  final  control  of  accounting 
matters  is  one  of  the  chief  executives  and  acts  in  an  advisory 
capacity  to  the  other  executives.  In  some  businesses  the 
treasurer  supervises  the  accounting  department  through  his  exer- 
cise of  general  financial  control.  The  modern  tendency  is  to 
have  a  separately  organized  accounting  department  with  a  re- 
sponsible executive  head,  though  this  executive  may  report  to 
the  controller  or  treasurer  instead  of  to  the  president  or  general 
manager.  The  existence  of  a  separate  department  will  be 
assumed  in  this  discussion.  In  the  latter  part  of  the  chapter 
the  duties  of  a  controller  and  his  relation  to  the  accounting 
department  will  be  explained. 

The  General  Auditor 

The  executive  head  of  the  accounting  department  is  known 
by  various  names.  He  may  be  called  "general  accountant," 
''plant  accountant,"  "general  auditor,"  or  by  some  other  similar 
title.  Sometimes  an  assistant  controller  exercises  this  function. 
The  terminology  of  accounting  is  not  exact,  and  the  titles  used 
to  designate  those  employed  in  accounting  work  are  not  stand- 
ardized. In  the  present  discussion  the  term  "general  auditor'' 
will  be  used  to  refer  to  the  accounting  executive  who  is  respon- 
sible for  the  proper  keeping  of  the  accounting  records  and  the 
preparation  of  the  necessary  financial  and  statistical  reports. 

Duties  of  the  General  Auditor 

It  is  the  duty  of  the  general  auditor  to  see  that  the  informa- 
tion necessary  for  the  management  of  the  business  is  available. 
l"o  perform  this  task  the  general  auditor,  acting  in  co-operation 
with  ajid  under  the  direction  of  the  controller,  must  prepare  the 
following: 

I .  The  reports  desired  by  the  executive  ofiicers,  the  prepara- 
tion of  which  is  one  of  the  general  auditor's  most 
important  tasks. 


ORGANIZATION  FOR  ACCOUNTING  CONTROL  3 

2.  A  classification  of  accounts  which  will  provide  for  a  proper 

analysis  and  classification  of  the  information  to  be 
presented  by  means  of  reports  to  the  executives.  With- 
out such  a  classification,  the  collection  of  accurate  and 
systematized  data  is  impossible. 

3.  A  system  of  records  to  serve  as  posting  mediums  to  the 

accounts.  Without  such  records  it  is  impossible  to 
collect  and  summarize  effectively  the  information  in 
the  accounts. 

4.  Standard  journal  voucher  forms  to  serve  as  a  means  of 

summarizing  details  and  of  transferring  these  details 
from  the  original  to  the  summarized  record. 

The  preparation  of  such  reports,  accounts,  records,  and 
vouchers  involves  the  entire  accounting  procedure — from  the 
beginning  of  a  transaction  until  its  final  effect  on  the  financial 
condition  of  the  business  is  shown  in  a  report. 

Internal  Organization 

It  is  customary  for  the  general  auditor  to  organize  the  ac- 
counting department  in  sections,  to  each  of  which  he  delegates  a 
certain  part  of  the  work  under  his  jurisdiction.  Typical  sections 
for  the  accounting  department  of  a  manufacturing  business  with 
sales  branches  are  the  following: 

1.  General  Office  Accounting  Section 

2.  Branch  Accounting  Section 

3.  Cost  Accounting  Section 

4.  Tabulating  Section 

5.  Sales  Classification  and  Analysis  Section 

6.  Pay-RoU  Section 

7.  Accounts  Payable  Section 

8.  Accounts  Receivable  Section 

9.  Billing  Section 

The  duties  of  each  of  these  sections  will  be  explained  briefly. 


4         ACCOUNTING— THEORY  AND  PRACTICE 

1.  General  OflSce  Accounting  Section 

The  general  office  accounting  section  makes,  for  control  pur- 
poses, a  summarized  record  of  the  information  collected  and  used 
by  all  the  other  sections.  It  is  the  central  control  section  into 
which  flow  in  condensed  and  classified  form  the  figures  recorded 
by  the  other  sections  in  detail.  This  section  has  control  of  the 
following: 

1.  The  general  ledger  containing  the  accounts  of  the  gen- 

eral office  and  controlling  accounts  for  each  branch  or 
division  of  the  company. 

2.  The  books  of  record  which  serve  as  posting  mediums  to 

the  general  ledger. 

3.  The  preparation  of  vouchers  for  all  charges  by  the  general 

office  to  the  branches  or  other  units.  These  charges 
may  be  for  interest  on  investment  in  the  branch,  for  the 
branch's  share  of  the  overhead  expenses  of  the  general 
office,  and  for  similar  items. 

4.  The  preparation  of  the  periodical  financial  statements. 

2.  Branch  Accounting  Section 

The  branch  accounting  section  is  the  intermediary  between 
the  accounting  department  of  the  general  office  and  the  branches. 
It  has  control  of  the  following: 

1 .  The  accounting  records  of  each  branch  kept  at  the  general 

office.  The  extent  of  these  records  depends  upon  the 
method  of  handling  the  branch  accounts. 

2.  The  preparation  of  summarized  reports  to  the  general 

accounting  section  from  which  the  latter  makes  the 
entries  to  its  branch  controlling  accounts. 

3.  The  preparation  of  the  financial  reports  for  the  branches, 

assuming  that  the  branch  ledgers  are  maintained  at  the 
general  office;  otherwise  there  is  no  necessity  for  a 
branch  accounting  section. 


ORGANIZATION  FOR  ACCOUNTING  CONTROL  5 

3.  Cost  Accounting  Section 

The  cost  accounting  or  "works  accounting"  section  is  re- 
sponsible for  all  records  relating  to  the  operations  of  the  factory. 
The  factory  ledger  is  controlled  by  a  Factory  Ledger  account  on 
the  general  office  ledger.  This  section  has  control  of  the  following : 

1 .  The  factory  ledger  containing  all  the  accounts  relating  to 

factory  operations. 

2.  The  records  of  original  entry  which  serve  as  posting 

mediums  to  the  factory  ledger. 

3.  The  detail  cost  sheets  showing  the  costs  of  individual 

orders. 

4.  The  preparation  of  the  monthly  journal  vouchers  which 

summarize  the  operations  for  the  use  of  the  general 
office  accounting  section. 

5.  The  preparation  of  the  periodical  expense  analysis  show- 

ing the  expenses  of  each  of  the  production  departments. 

4.  Tabulating  Section 

If  tabulating  machines  are  used  in  the  compilation  of  account- 
ing and  statistical  data,  it  is  customary  to  establish  a  separate 
section  of  the  accounting  department  to  handle  this  work.  This 
section  has  control  of  the  following: 

1 .  The  tabulating  of  sales  invoices  and  purchase  invoices  to 

show  any  classification  desired  for  control  purposes. 

2.  The  tabulating  of  material  issue  tickets  or  requisitions 

and  labor  tickets  to  show  the  classification  desired  for 
entry  in  the  cost  records. 

3.  The  preparation  of  reports  showing  the  results  of  the 

tabulations  performed  in  (i)  and  (2). 

5.  Sales  Classification  and  Analysis  Section 

If  a  business  maintains  an  extensive  classification  of  sales 
with  a  corresponding  classification  of  the  cost  of  sales,  it  is  de- 
sirable for  a  separate  section  of  the  accounting  department  to  be 


6        ACCOUNTING— THEORY  AND  PRACTICE 

responsible  for  indicating  the  classification  of  each  item  on  the 
sales  invoice.  If  the  invoices  are  used  as  a  basis  of  costing  the 
sales,  this  section  will  be  responsible  for  showing  the  cost  of  sales 
and  the  cost  classification  on  the  invoice. 

6.  The  Pay-RoU  Section 

The  pay-roll  section  has  control  of  the  following: 

1.  Pricing  and  extensions  of  all  labor  tickets. 

2.  Preparation  of  pay-roll  for  use  of  the  cashier  in  paying 

employees. 

3.  Preparation  of  reports  to  accounts  payable  section  as  a 

basis  of  entry  to  the  voucher  record.  If  a  tabulating 
section  is  maintained,  this  information  may  be  provided 
by  it. 

7.  Accounts  Payable  Section 

The  accounts  payable  section  has  control  of  the  following: 

1 .  The  vouchering  of  all  invoices. 

2.  The  maintenance  of  the  vouchers  payable  record  which 

shows  the  voucher  distribution. 

3.  The  preparation  of  checks  in  payment  of  the  vouchers,  to 

receive  the  signature  of  the  treasurer. 
4..  The  maintenance  of  paid  and  unpaid  voucher  files. 

5.  The  preparation  of  the  record  of  cash  disbursements. 

6.  The  preparation  of  the  journal  vouchers  which  summarize 

the  voucher  distribution  for  the  use  of  the  general  ofl&ce 
accounting  section. 

8.  Accounts  Receivable  Section 

The  accounts  receivable  section  has  control  of  the  following : 

I.  The  accounts  receivable  ledger  showing  the  accounts  of 
the  customers  of  the  general  office.  If  the  accounts 
receivable  of  the  branches  are  collected  by  the  general 


ORGANIZATION  FOR  ACCOUNTING  CONTROL       7 

office,  the  accounts  receivable  section  will  maintain  an 
accounts  receivable  ledger  for  each  branch. 
2.  The  preparation  of  monthly  statements  to  be  sent  to  the 
customers  and  for  the  use  of  the  credit  department. 

9.  Billing  Section 

The  billing  section  has  control  of  the  following: 

1.  The  extension  of  all  orders  received  from  customers.    If 

a  separate  pricing  section  is  not  maintained,  the  billing 
section  will  be  required  to  enter  the  price  on  the  order 
as  well  as  make  the  extensions. 

2.  The  preparation  of  all  invoices  sent  to  customers  or  to 

branches. 

It  is  not  intended  that  the  foregoing  statement  of  the  duties 
of  the  various  sections  be  regarded  as  in  any  way  final.  Every 
business  must  organize  its  accounting  department  to  fit  its  parti- 
cular needs,  hence  the  discussion  here  is  suggestive  only.  The 
duties  performed  by  the  various  sections  are  closely  related,  and 
many  of  them  can  easily  be  shifted  from  one  to  the  other. 

The  Interrelations  of  Sections 

To  make  up  their  records,  some  sections  need  information 
from  others.  For  instance,  the  general  oflSce  accounting  section 
must  receive  information  from  the  branch,  cost,  tabulating, 
billing,  and  accounts  sections;  the  cost  accounting  section  must 
receive  information  from  the  tabulating,  accounts  payable,  and 
pay-roll  sections  to  make  its  records  of  original  entry.  To  trans- 
fer this  information  in  summarized  and  classified  form  journal 
vouchers,  as  shown  in  Form  i,  may  be  used. 

Vouchers  of  uniform  size  and  ruling  and  numbered  consecu- 
tively are  used  for  the  transfer  of  information  between  all  ac- 
counting sections,  and  a  number  should  be  assigned  for  each  type 
of  information.  If  the  section  responsible  for  the  preparation  of 
each  voucher  is  determined  and  a  date  is  set  for  its  completion 


8 


ACCOUNTING— THEORY  AND  PRACTICE 


and  transmission,  such  a  schedule  enables  a  check  to  be  exercised 
on  the  activities  of  each  section.  Unless  such  a  schedule  is 
maintained,  the  work  of  some  sections  will  be  delayed  by  failure 
to  receive  information  from  other  sections. 


From 

JOURNAL 

VOUCHER 
Vouchc 

5rN 
Jo. 

1. 

To                                                                  Fnlin  T^ 

NatlifP  of  Entry 

Date  - 

19 

Account  and 
Description 

Detail 

General 
Ledger 

Customers 
Ledger 

Debit 

Acct. 
No. 

Credit 

Debit 

Credit 

^ — 

— , 

J 

^ 

L-l 

1 1 

' — 1 

' 1 

L-J 

" — 

■- 

1 — ^^ 

— 

— 

Entered                                                         Approved 

Bookkeeper                        *                                    General  Auditor 

Form  I.    Journal  Voucher 


The  first  requisite  of  a  well-organized  accounting  system  is 
to  have  the  voucher  reports  made  regularly.  This  requirement 
involves  the  co-operation  of  the  employees  and  officers  with  the 
general  auditor  and  his  staff.  While  the  head  of  the  accounting 
department  must  be  responsible  for  the  maintenance  of  the  ac- 
counting records,  he  cannot  accomplish  his  task  unless  those 
responsible  for  the  initiation  of  transactions  are  made  to 
realize  the  importance  of  reporting  them  promptly.  They  can 
be  made  aware  of  their  part  in  this  relationship  by  being  required, 
to  fill  out  certain  forms  by  a  stipulated  time.  This  necessitates 
the  establishment  and  enforcement  of  a  journal  voucher  schedule. 


ORGANIZATION  FOR  ACCOUNTING  CONTROL  9 

The  journal  vouchers  received  by  each  section  are  filed  in  a 
loose-leaf  binder  and  used  as  a  posting  medium  to  the  records  of 
the  section. 

Relation  of  General  Auditor  to  Others 

The  attitude  of  the  general  auditor  to  the  public  auditor 
should  be  one  of  cordial  co-operation.  The  inspection  of  the 
books  of  account  by  the  outside  auditor  is  necessary  to  inspire 
confidence  in  the  impartiality  of  the  statements.  The  judgment 
of  the  outside  auditor  is  made  in  an  impersonal  way  without  the 
bias  that  quite  naturally  may  arise  in  the  mind  of  the  accountant 
who  is  associated  with  the  activities  of  one  particular  business. 

The  functions  of  the  outside  auditor  may  vary  from  checking 
the  work  done  to  making  constructive  suggestions  for  improving 
the  methods  of  recording  and  presenting  the  accounting  and 
statistical  data.  In  the  past  the  public  auditor  devoted  himself 
primarily  to  the  task  of  verification.  The  modern  tendency  is 
to  value  his  services,  because  to  his  analysis  he  brings  a  new 
point  of  view  and  he  is  able  to  oflfer  and  suggest  improvements  in 
methods  out  of  the  wealth  of  his  varied  experience  with  many 
kinds  of  business. 

Within  the  organization  the  company's  general  auditor  may 
be  assisted  by  men  who  serve  as  links  between  the  accounting 
department  and  other  departments  of  the  business,  such  as  sell- 
ing, purchasing,  and  production.  If  the  auditor  is  responsible 
•  for  devising  the  records  used  to  gather  information  about  the 
transactions  in  these  departments,  he  should  have  the  oppor- 
tunity of  seeing  that  the  records  are  properly  used  and  that  the 
information  placed  on  them  accords  with  the  directions  of  the 
accounting  department.  This  usually  may  be  best  accompHshed 
by  his  representatives  who  exercise  supervision  over  the  records 
within  each  department. 

Finally  the  auditor  may  be  concerned  with  the  developing  of 
statistical  records  and  reports.  In  every  business  statistical 
reports  must  be  made  both  from  the  accounting  records  and 


10  ACCOUNTING— THEORY  AND  PRACTICE 

from  other  sources.  In  some  cases  these  reports  are  prepared 
by  the  accounting  department,  in  others,  by  a  separate  statistical 
organization.  In  any  case,  close  co-operation  between  the 
statistical  department  and  the  accounting  department  is  necessary 
not  only  to  prevent  duplication  and  overlapping,  but  also  to  en- 
able each  department  to  have  the  benefits  of  the  other's  records 
and  reports  in  interpreting  its  own. 

The  Duties  of  the  Controller 

The  controller  is  one  of  the  principal  executives  of  a  business. 
He  is  elected  usually  by  the  board  of  directors  and  is  answerable 
directly  to  them,  although  under  the  executive  direction  of  the 
president.  If  his  work  is  to  be  effective,  he  should  have  the  same 
official  standing  as  the  executives  in  charge  of  sales,  production, 
and  finance.  Otherwise  he  is  apt  to  have  difficulty  in  obtaining 
the  co-operation  necessary  for  the  successful  accomplishment  of 
his  task. 

The  controller  is  responsible  for  the  use  of  the  accounts  rather 
than  for  their  construction.  Therefore  he  should  be  the  final 
authority  on  accounting  methods  and  procedure.  He  should  be 
responsible  less  for  the  execution  of  his  plans  and  suggestions  than 
for  the  interpretation  of  the  accounting  reports  and  should  submit 
recommendations  based  on  these  reports  to  the  other  executives. 

The  duties  of  the  controller  will  depend  upon  the  organiza- 
tion of  the  business.  Sometimes,  in  addition  to  the  function  of 
controller,  he  performs  that  of  an  auditor  though  some  of  the 
latter  official's  duties  may  devolve  upon  the  assistant  controller. 
This  is  only  a  variation  in  terminology,  however,  and  not  in  the 
principle  previously  stated  that  a  general  auditor  or  other  execu- 
tive should  be  head  of  the  accounting  department. 

Relation  of  the  Controller  to  the  Auditing  Organization 

In  general  terms  the  controller  directs,  while  the  auditor  per- 
forms. In  pursuance  of  this  policy,  the  controller  either  outlines 
the  classification  of  accounts  and  the  supporting  records  to  be 


ORGANIZATION  FOR  ACCOUNTING  CONTROL  II 

used,  or  approves  those  prepared  by  the  general  auditor.  Ihe 
general  auditor  is  responsible  for  the  maintenance  of  the  records 
and  accounts  after  they  have  been  authorized  and  for  the  reports 
prepared  from  the  accounting  records.  The  controller  may  pre- 
scribe the  form  and  content  of  the  reports  but  the  general  auditor 
is  responsible  for  the  preparation  of  the  reports  sent  to  the  execu- 
tives and  board  of  directors.  Usually  the  general  auditor  sub- 
mits these  reports  to  the  controller  for  his  approval  before  they 
are  distributed.  In  some  cases  the  controller  maintains  a  record 
of  the  reports  to  be  prepared  and  of  the  parties  who  are  to  receive 
them,  in  which  case,  after  he  has  approved  them  they  are  dis- 
tributed from  his  office.  This  affords  a  central  control  of  the 
distribution  of  reports. 

Being  responsible  for  the  interpretation  of  the  accounting 
reports,  the  controller  should  study  them  as  a  basis  for  offering 
recommendations  to  the  executive  officers.  He  should  explain 
variations  from  the  normal  in  the  operations  of  the  business,  and 
either  submit  his  explanation  with  the  report,  or  reports,  con- 
cerned, or  transmit  it  as  early  as  possible  to  the  officials  interested. 
The  officials  should  have  the  privilege  of  requesting  from  the 
controller  such  information  as  they  may  need  to  interpret  the 
reports  or  to  serve  as  a  basis  for  action  made  necessary  or  de- 
sirable by  the  information  disclosed  by  the  reports.  The  con- 
troller maintains  files  of  all  reports  and  of  all  correspondence 
concerning  the  meaning  or  interpretation  of  accounts  and  the 
accounting  reports. 

The  controller  is  responsible  for  issuing  orders  covering 
methods  and  procedure  not  only  in  the  accounting  department, 
but  in  other  departments  over  which  he  has  functional  control. 
For  instance,  he  may  have  control  over  the  balance  of  stores 
records  maintained  in  the  production  department,  the  shipping 
procedure  of  the  shipping  department,  and  similar  activities  in 
other  departments.  A  file  of  all  orders  issued  by  the  controller 
should  be  kept  to  serve  as  official  authority  for  the  methods 
employed . 


12  ACCOUNTING— THEORY  AND  PRACTICE 

Staff  of  the  Controller 

The  controller  usually  has  a  staff  to  assist  him  in  the  perform- 
ance of  his  functions.  The  size  of  this  staff  and  its  duties  are 
dependent  on  the  size  of  the  business  and  the  extent  of  the  au- 
thority exercised  by  the  controller.  If  a  system  of  budgetary 
control  is  maintained  under  his  direction,  it  will  be  necessary  for 
him  to  have  a  statistical  staff  to  compile  the  original  estimates 
and  to  summarize  the  periodical  reports  showing  the  comparisons 
between  estimates  and  results.  When  a  complete  system  of 
budgetary  control  is  operated,  this  is  a  task  of  considerable 
magnitude. 

Assistants  to  the  controller  may  also  render  aid  in  the  inter- 
pretation of  reports  and  the  preparation  of  comments  thereon. 
Certain  assistants  may  devote  their  time  to  a  study  of  methods 
and  the  preparation  of  orders  putting  into  effect  any  changes 
which  have  been  decided  upon.  Occasionally  such  work  is  carried 
on  by  a  methods  bureau  attached  to  the  controller's  office  which 
not  only  recommends  the  adoption  of  new  methods,  but  supervises 
their  installation  after  they  are  authorized.  In  addition  to  the 
staff  which  is  directly  responsible  to  him,  the  controller  has  func- 
tional representatives  in  other  departments  of  the  business  work- 
ing under  him  to  obtain  the  correlation  of  functions.  These 
representatives  may  be  responsible  directly  to  him,  or  they  may 
be  answerable  to  the  line  executive  in  the  department  where  em- 
ployed. In  any  case,  they  must  co-operate  with  the  controller 
so  that  effective  control  may  be  exercised. 

As  illustrations  of  such  functional  representatives  may  be 
mentioned  the  following: 

1 .  Sales  and  Publicity  Controller 

2.  Operating  and  Production  Controller 

3.  Buying  and  Merchandise  Controller 

4.  Credit  Officer  as  Credit  Controller 

The  sales  and  publicity  controller  is  responsible  for  the 

following: 


ORGANIZATION  FOR  ACCOUNTING  CONTROL  1 3 

1.  Supervision  of  the  collection  of  statistical  data  with 

reference  to  sales  and  the  preparation  of  reports  to 
show  how  effectively  the  sales  program  is  being 
executed. 

2.  Supervision  of  the  sales  expense  budget  and  the  prepara- 

tion of  reports  in  connection  therewith. 

3.  Supervision  of  the  advertising  expense  budget  and  the 

preparation  of  the  reports  which  make  possible  this 
control. 

It  is  also  the  duty  of  the  sales  and  publicity  controller  to  advise 
and  assist  in  the  preparation  of  the  sales  budget,  selling  expense 
budget,  and  advertising  budget.  But  the  actual  preparation  of 
these  budgets  should  be  left  to  the  executives  responsible  for  their 
execution. 

The  operating  and  production  controller  is  responsible  for  the 
following: 

1.  The  collection  and  interpretation  of  data  as  a  basis  of 

plans  for  more  effective  operating  methods. 

2.  The  preparation  and  interpretation  of  data  to  be  used  in 

the  formulation  of  the  production  budget.  The  prepa- 
ration of  this  budget  should  be  left  to  the  executives 
responsible  for  its  execution. 

3.  The  supervision  of  the  execution  of  the  production  budget 

and  the  preparation  of  reports  which  will  make  possible 
comparisons  of  actual  with  estimated  production. 

The  buying  and  merchandise  controller  performs  a  function 
in  the  mercantile  establishment  similar  to  that  performed  by  the 
operating  and  production  controller  in  a  manufacturing  establish- 
ment.    Some  of  his  most  important  duties  are: 

1.  The  preparation  of  data  as  a  basis  for  the  buying  budget. 

2.  The  supervision  of  the  buying  budget  and  the  preparation 

of  reports  which  will  make  possible  control  of  this 
budget. 


14  ACCOUNTING— THEORY  AND  PRACTICE 

3.  The  supervision  of  merchandise  stocks  for  the  purpose  of 
keeping  them  at  the  lowest  minimum  consistent  with 
meeting  sales  demands. 

In  an  estabhshment  carrying  large  stocks,  this  last  task  is  of 
considerable  magnitude  and  of  great  importance. 

The  credit  manager  is  usually  not  directly  answerable  to  the 
controller,  but  these  two  officials  must  co-operate  to  obtain  proper 
control  of  the  credit  of  the  firm.  The  establishment  and  enforce- 
ment of  credit  limitations  are  dependent  largely  on  the  informa- 
tion provided  by  the  accounting  records;  moreover,  the  credit 
plans  and  possibihties  are  an  important  factor  in  the  formulation 
of  the  general  budgetary  plans.  The  credit  that  may  be  obtained 
and  must  be  granted  affects  the  sales  and  financial  plans  to  a  de- 
cided degree.  Consequently  the  credit  manager  working  with 
the  controller  must  formulate  his  credit  plans  and  see  that  they 
are  carried  out. 

The  foregoing  explanation  does  not  imply  that  functional 
representatives  of  the  controller  act  in  an  executive  capacity. 
Their  duty  is  to  advise  and  supervise.  The  line  executives 
exercise  the  control,  but  the  controller,  or  his  representative, 
makes  it  possible  for  this  control  to  be  exercised  in  a  rational 
way.  Executives  may  or  may  not  bear  the  titles  suggested  in 
the  preceding  discussion  and  duties  ascribed  to  them  may  be 
performed  by  the  controller's  assistants  or  by  assistants  of  the 
departmental  executives.  As  before  explained,  the  purpose  of 
the  present  discussion  is  not  to  formulate  an  arbitrary  plan  of 
organization,  but  to  emphasize  the  necessity  for  the  performance 
of  these  functions  and  correlating  them  with  the  functions  of  the 
controller. 

Controller's  Use  of  Advisory  Ofl&cers 

As  indicated  by  the  preceding  discussion,  the  controller  is 
brought  into  intimate  contact  with  every  phase  of  the  business 
and  it  is  his  function  to  formulate  methods  of  control  for  all  de- 
partmental activities.    In  the  performance  of  this  task,  he  is 


ORGANIZATION  FOR  ACCOUNTING  CONTROL  15 

forced  to  deal  with  technical  matters  with  which  he  cannot  be 
expected  to  be  famihar,  consequently  it  is  necessary  for  him  to 
consult  other  officers  of  the  corporation  to  obtain  the  technical 
information  he  needs.  To  indicate  the  possibility  of  co-opera- 
tion between  the  controller  and  such  advisory  officers  a  few 
illustrations  are  given. 

Many  large  corporations  employ  an  attorney  who  devotes  his 
full  time  to  the  service  of  the  corporation.  Smaller  corporations 
retain  attorneys  to  serve  as  counsel  when  needed.  In  either  case 
the  controller  should  have  the  privilege  of  consulting  such  counsel 
on  legal  matters  pertaining  to  the  corporation.  Questions  re- 
lating to  taxation,  reorganization,  increase  of  stock,  or  bonded 
debt  are  illustrations  of  matters  which  it  may  be  desirable  to 
submit  to  legal  counsel.  Since  the  accounting  records  reflect  the 
operations  of  the  business,  all  legal  questions  involving  the 
business  are  of  importance  to  the  controller  and  his  staff. 

On  questions  of  maintenance  and  equipment  engineers  should 
be  consulted.  In  the  control  of  the  cost  of  maintenance  of  plant 
and  equipment,  the  engineer  and  the  appraiser  may  render  useful 
service  in  the  making  of  budgets  and  the  estimating  of  costs. 
The  service  of  the  engineer  and  the  service  of  the  controller 
should  supplement  each  other. 

On  questions  of  production  costs  and  production  methods,  the 
efficiency  engineer  should  be  consulted.  Just  as  the  mechanical 
engineer  may  be  of  service  in  advising  with  reference  to  plant 
and  equipment  cost  and  maintenance,  so  may  the  efficiency 
engineer  be  of  service  in  advising  with  reference  to  the  most 
efficient  methods  of  using  the  plant  and  equipment.  His  service 
and  advice  should  be  available  to  the  controller  both  in  making 
plans  and  in  judging  the  efficiency  with  which  these  plans  are 
carried  out. 

The  officers  in  charge  of  buying  and  of  merchandise  stock  can 
render  valuable  assistance  in  the  preparation  of  the  buying  budget 
and  in  exercising  control  of  merchandise  stock.  Only  by  a  proper 
consideration  of  market  conditions,  as  reflected  in  the  reports  of 


I6 


ACCOUNTING— THEORY  AND  PRACTICE 


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ORGANIZATION  FOR  ACCOUNTING  CONTROL  1 7 

the  officers  engaged  in  the  merchandise  operations,  can  the  con- 
troller make  rational  plans  with  reference  to  purchases  of  stock, 
or  properly  interpret  the  results  obtained  in  the  performance  of 
these  plans. 

In  the  same  manner  in  which  the  controller  must  consult  the 
buying  officer  with  reference  to  purchases  and  stock  control,  he 
must  consult  the  sales  officers  on  sales  control.  Sales  plans  and 
poHcies  must  consider  market  conditions  and  such  conditions  can 
be  ascertained  most  easily  and  accurately  from  those  engaged  in 
mercantile  operations. 

Finally  the  controller  should  consult  the  auditor  with  refer- 
ence to  accounting  details  and  the  interpretation  of  accounts, 
subsidiary  statements,  and  reports  with  which  he  is  not  familiar. 

From  the  preceding  discussion  it  can  be  seen  that  the  proper 
function  of  the  controller  is  to  assemble  data  with  reference  to  all 
the  activities  of  the  business,  analyzing,  classifying,  and  present- 
ing these  data,  and  finally  recommending  methods  of  procedure 
based  on  the  proper  interpretation  of  these  facts. 

Illustration  of  Accounting  Organization 

To  illustrate  concretely  the  organization  through  which  ac- 
counting and  statistical  control  is  exercised,  a  chart  (Form  2)  is 
given.  It  gives  a  typical  organization  of  the  accounting  depart- 
ment of  a  large  manufacturing  business  and  indicates  the  lines  of 
control  and  the  interrelationships  of  duties  and  functions. 

VOL.  Ill 2 


CHAPTER  II 

ANALYSIS   OF  BORROWERS'  FINANCIAL 
STATEMENTS 

By  Charles  M.  Neubauer 

Basis  of  Credit 

The  basis  of  credit  received  from  a  bank  or  banker,  as  well  as 
that  received  from  a  commercial  house,  must  be  the  moral  charac- 
ter of  the  borrower.  Without  that  element  no  loan  is  safe  even 
if  secured,  unless  it  is  given  a  certain  amount  of  supervision, 
which  most  often  is  daily.  The  question  immediately  presents 
itself:  Is  such  constant  supervision  profitable?  The  answer  to 
this  is  invariably  that  it  is  not.  This  is  particularly  true  if  the 
loan  is  what  may  be  called  "legitimate,"  that  is,  presenting  no  un- 
due or  disproportionate  amount  of  profit.  Under  this  head  of 
moral  character  are  classed  the  concern's  general  reputation  in  the 
trade,  that  is,  whether  it  carries  out  its  contracts  and  agreements 
in  the  spirit  as  well  as  in  letter;  the  personal  reputation  of  its 
proprietors  or  officers ;  and  the  ability  of  its  personnel  to  conduct 
the  business  safely,  properly,  and  profitably.  Thus  the  character 
and  capacity  of  the  concern  must  be  definitely  established  before 
its  financial  statement  becomes  an  important  factor.  A  lack  of 
sound  moral  character  and  good  business  capacity  makes  the 
financial  statement  entirely  negligible. 

It  is  well  to  remember  that  bank  loans  are  ordinarily  made 
for  short  terms  and  are  for  the  purpose  of  augmenting  the  work- 
ing capital  of  a  concern  for  the  limited  period  when  its  buying, 
manufacturing,  or  trading  is  at  its  height.  The  loan  is  intended 
to  supplement  temporarily  the  invested  capital  of  the  proprietory 
interests  during  such  period,  and  not  to  become  permanent. 
General  commercial  bank  loans  run  from  30  to  90  days,  any 

18 


ANALYSIS  OF  BORROWERS'  STATEMENTS  19 

longer  term  being  considered  more  or  less  exceptional  and  as 
presenting  a  special  problem. 

Financial  Statements 

Form  I  illustrates  the  kind  of  financial  information  required 
by  a  large  New  York  bank  relative  to  a  concern's  standing  in 
order  to  pass  adequately  and  justly  upon  the  granting  of  credit. 
The  balance  sheet  (Form  la)  occupies  the  place  of  prominence. 
It  appears  on  the  first  of  the  four  pages  of  the  financial  statements, 
and  is  supported  by  schedules  of  accounts  of  greatest  interest  to 
the  banker,  and  by  other  schedules  giving  specific  information  as 
to  acquirement,  valuation,  and  liquidation  of  the  different  items. 
These  schedules  appear  on  the  subsequent  pages  of  the  statement. 

The  assets  in  the  balance  sheet  are  divided  into  three  groups, 
viz.,  Quick,  Invested,  and  Deferred  Charges.  Under  Quick  Assets 
are  listed,  practically  in  the  order  of  their  liquidity,  Cash  on 
Hand,  Cash  in  Banks,  Notes  Receivable,  Accounts  Receivable, 
and  Inventory.  Under  this  head  the  item  of  Liberty  Bonds  may 
also  be  placed.  The  bonds,  however,  are  thus  classified  for 
purely  patriotic  reasons  as  the  practice  is  an  exception  to  the 
principle  upon  which  the  grouping  of  assets  is  based.  The 
five  items  given  above  comprise  all  that  it  is  proper  to  include 
under  the  head  of  Quick  Assets,  unless  there  is  some  other  ac- 
count which  it  is  reasonably  certain  will  be  turned  into  cash 
within,  say,  a  3  or  4  months'  period. 

Under  the  title.  Invested  Assets,  are  all  accounts  representing 
permanent  assets,  such  as  the  following:  Land,  Buildings,  Ma- 
chinery, Fixtures,  Equipment,  Investments,  Patents,  and 
Good-Will. 

Under  Deferred  Charges  are  entered  items  of  the  nature 
implied  by  the  term,  such  as  Unexpired  Insurance  Premiums, 
Prepaid  Interest,  etc. 

A  separate  total  is  carried  out  for  each  class  and  a  grand  total 
effected. 

The  liabilities  are  classified  in  two  groups — the  Short-Term 


20 


ACCOUNTING— THEORY  AND  PRACTICE 


COHrORATE  rORM                                                                                                                                                         CREDtT  FBX  Hfc 
NAME  (C.rponM  SiyU  Unkf  Ouuut)           Do*  *  Ho*  Corporalum 
LOCATION                                                *00  Broadway,  N.  Y.  City 

To NATIONAL  BANK,  New  York 

Tkt  follo-lnr  In*  utd  icciraw  iuifm(nl  of  \U  BnincUl  tondiiloi.  of  Ihii  Corpontion  m  Ike  W  dar      ol    Dteember    M«0  it  ndt  nj 
fumiihcd  by  the  undcnicncd  for  the  purpou  of  procurmc  Credit  from  time  to  time  wiili  you  tot  our  tirgoiMblc  ptper  or  otherwiic. 

BALANCE    SHEET                            IF.d.r.l  R...n,.  ...l.  «—         _.. 

triviu 

TOTAL                   1 

QUICIC  ASSETS 
C>ih  oo  Hind 
CuliUBuk>(tcl»duUl) 
NotM  Recrivibk  (Schrduk  2) 
Accouati  Receivable  (Seliedgh  2) 
bvetitoty  (Sebedulc  ]) 

INVESTED  ASSETS 

Undl  Schedule  ■) 

Buddiniil  SrhedtJe  t) 

Muhinery,  Fixture*,  Equipmcm  (IcN  RcMrv*  9  18,009 

Invenmenti  (Sebedule  4) 

Patents  and  Goodwill 

DEFERRED  CHARGES 

Uoespired  Iniuiuicc  Prcmiunu 
Prepaid  Intereit,  etc. 

1 

56 
100 
lt56 
56S 

5i7 
507 
000 
768 
HO 

50 
75 

09 

75 
300 
250 

25 
200 

000 
000 
000 
000 
000 

- 

1 

183 

763 

3i 

5 

660 

280 

25 
iO 

850 

000 

" 

9 

9i0 

65 

2  OiS   70S    99  1 

UAliLtTia 

Ts-tr. 

roTiu. 

SHORT  TERM  INDEBTEDNESS  (Dao  Willii.  Ooo  You) 

Notei  given  for  Merchandia* 

Notri  given  for  Borrowed  Money  (Schedule  1) 

Accounti  Payable  (Schedule  6) 

Liability  for  Acceptance!  under  Lettera  o(  Credit  (Srhcdule  1) 

Depoiili  of  Money  (bcbedule  )) 

Dividends  Unpaid,  Accrued  and  other  Liabititiea 

LONG  TERM  INDEBTEDNESS  (D«o  Aflor  Osto  Ynr) 

Notes  ^vcn  lor  BoreoMed  Money  (Sctlfdule  1) 

Cepo.ilsol  Money  (Schedule  1) 

Bonded  Drht.  (Schedule  7| 

<ktor<|:aJes  on  Real  Estite  or  Chattels  1  tchethk  1) 

Other  Liabilities  due  after  one  year 

i2 
250 
490 

iO 
150 

75 

050 
000 
iSO 
000 
000 
000 

60 

1 

0i7 

530 

60 

100 
125 
50 

60 

000 
000 
000 

000 

— 

335 

000 

«,..u..,uy,.. 

382 

530 

60 

CAPITAL 

Ptefrned  Slock  Issuetl                                                                      < 

Common  Stock  Issued 

Surplus  (As  per  Sutplus  Account)  Deficit 

Deftit  (Ai  Per  Surplus  Account) 

500 
500 
338 

000 
000 
826 

61 

661 

173 

39 

Amount  o(  Forward  Purchases  not  included  in  eitlier  Alietl  or  LilbiUia    tl*t,000                                            _         .    „        „ 

Doe  &  Roe  Corporation 
not  ucMmi  Richard  Roe 
^                                               TreaMurer 

Form  I.     (a)  Financial  Statement  Submitted  to  Bank  by  Borrower  (first  page) 


ANALYSIS  OF  BORROWERS'  STATEMENTS  21 

Indebtedness  and  the  Long-Term  Indebtedness,  The  Short- 
Term  Indebtedness  is  indebtedness  due  within  one  year  from  the 
date  of  the  statement.  It  includes  the  following  items,  given  in 
the  order  named,  in  which  it  is  presumed  the  debts  will  mature: 
Notes  given  for  Merchandise,  Notes  given  for  Borrowed  Money, 
Accounts  Payable,  Liability  for  Acceptances  under  Letters  of 
Credit,  Deposits  of  Money,  Dividends  Unpaid  and  Accrued,  and 
other  liabilities  due  within  one  year. 

Long-Term  Indebtedness  embraces  the  liabilities  due  after 
one  year  from  the  date  of  the  statement,  and  includes  such  items 
as  Notes  given  for  Borrowed  Money,  Deposits  of  Money,  Bonded 
Debt,  Mortgages  on  Real  Estate  or  Chattels,  Other  Liabilities 
due  after  one  year,  and  any  special  reserves  not  deducted  from 
the  assets.  It  is  to  be  noted  that  valuation  reserves  are  to  be 
shown  in  the  balance  sheet  as  deductions  from  the  asset  items  to 
which  they  pertain.  A  further  concession  is  allowed  in  the  mat- 
ter of  the  Liberty  Bond  item.  Any  indebtedness  due  to  borrow- 
ing money  against  the  pledge  of  Liberty  bonds  may  be  deducted 
from  the  total  par  value  of  Liberty  bonds  held  and  the  Liberty 
Bond  item  stated  net  under  the  quick  assets  or  simply  the  equity 
shown.  No  mention  of  the  indebtedness  need  then  be  made 
upon  the  balance  sheet. 

The  capital  items  are  as  usual  in  the  same  section  with  the 
Uabilities,  and  are  divided  to  show  preferred,  common,  or  any 
other  classes  of  stock  issued;  also  surplus  or  deficit. 

The  amount  of  forward  purchases  or  commitments  for  mer- 
chandise, either  on  order  or  contract,  which  are  not  included  in 
the  assets  or  liabilities,  is  also  considered  a  very  important  ele- 
ment, and  space  is  provided  for  this  information  on  the  same 
page  with  the  balance  sheet.  At  the  foot  of  the  page  the  borrower 
affixes  his  signature. 

Accounts  and  Schedules 

The  remaining  three  pages  of  the  financial  statement  (Forms 
lb,  c,  and  d)  contain  the  accounts  and  schedules.     A  section 


22 


ACCOUNTING— THEORY  AND  PRACTICE 


CONTmCENT  LUBILITY        (F«l«r>l  Rmmt«  Bsak  IU«lr«iBMil)                                                          1 

PO«U 

tOtLtl 

.MOU.X            1 

Ujion  Cujtomeri  Notci 

Discounted,  Sold,  or  Otherwii*  Truifenvd 

Upon  Drafti  Di>couated  or  Sold 

Upon  Boods  or  other  Obligation!  of 

SubiidUiy  Coi. 
Upon  Leaut 
Uoon  Unused  LettCT*  of  Crrdit  Outitandin? 

25 

000 

For  Accommodation  Endorsements  or  Guarantees 

Under  Conditional  Sale  Coouacu 

or  Purchase  Arrangements 

Under  Agreement  for  Stock  or  other  Subwriptioa 

Under  Pending  Law  SuiU 

It  thi*  Company  a  guarantor  or  CDdurtcr  of  any  liabititiri  of  any  individiia],  firm,  or  corporation,  or  is  it  liable  luder  any  contiacu  bonda  or  pro&( 
tharing  anaogrmrDU  or  any  other  aggreeroentt,  or  are  there  any  law-tuiu  pending  eajept  as  tet  forth  above? 

PRnFIT  AND  LOSS  ACCOUNT  FROM           Dec.  SI             1»  M  l«           Dee.  St              i»  «0 

Inventory  at  beginning  of  Period  (Dec.Sl  liW 

Purcha«t.Net  (LeJi  Retumi,  etc.,  $  S0,000  )       2 

Operating  Expenaea 

Gcnclal  Expensea 

Bad  Debts  Charged  Off 

Depreciation  Charged  Oil 

Reserves  Created 

nrr  paom- 

i02 
200 
SH2 
126 
U 
15 

970 
500 
i56 
750 
560 
000 

80 

20 
h5 
15 

Inventory  at  End  of  Period  (    Dec.  SX      19(0; 

Sales-Net  (Usa  Retiiru,  etc.,  (       tS,000        J    2 

Commissions  Earned 

Discounts  Earaed 

Income  from  Invettmeots,  etc 

Losses  of  Previous  Periods  Recovered 

568 
350 

26 
1 

U5 

9i0 
670 

075 
250 

302 

00 
00 

50 
10 

092 

237 

60 

092 

237 

60 

SURPLUS  ACCOUNT  FISCAL  PERIOD  ENDING                      SI  December                    I»  tO 

Deficit  at  beginning  of  Period 
Dividends  Paid  Ptef.  >                  Com.  t 
Special  Reserves  Created 
Other  Charges  to  Siupltis 

Net.  Loss   ('«""  Fit  Acct » 
Surplus  as  per  sutemeol 

108 
75 
10 

H5 

521, 
000 
000 

302 

51 
10 

Surplus  at  beginning  of  Period 
Ctediu  to  Surplus  during  Period 

Net  Fn>fit(framPiiL  Acct.) 
Deficit  ai  pep  Strtement 

SS8 

826 

61 

338 

826 

61 

INSURANCE 

pool 

as.iTs  coviaro 

atNlF.ciaav 

ASSlCKtl 

—           1 

Fire 

Fire 

Credit 

Lite 

Other  Kinda 

Merchandise 

Buildings  and  Equipment 
Accounts  and  Bills  Receivable 
Endorsers  or  Executives 

Corp. 

TOT«L    1 

500 
500 

200 

000 
000 

000 

- 

200 

000 

— 

5CHED.  1  CASH.  NOTES  GIVEN  FOR  BORROWED  MONEY,  AND  LIABILITY  FOR  ACCEPTANCES  UNDER  LETTERS  OF  CREDIT 

D>p«s.TO>Y  aA»as 

o!^.f'^Zl"M 

U»,JC,«,.«.- 

Firet  National  Bank 
Secund  National  Bank 
City  Trust  Co. 

Home  Trunt  &  Saving  Bank 

oTMnt  Soviets  OP  dtiotr 
(Note  Broker) 

Total  as  per  Balince  Sheet 

12 
10 

zs 

10 

0i5 
597 
S64 
500 

90 
05 
80 

75 
75 
100 
50 

000 
000 
000 
000 

- 

75 
50 
75 
50 

000 
000 
000 
000 

- 

iO 

000 

- 

TOJUm 

56 

50? 

75 

300  000 

250 

000 

1,0 

000 

If  your  Branches  borrotv  locally,  sute  amotsot  owing  not  iocluded  ia  bills  payable  (Schedule  1}  $ 

I'\r)n  I. 


{b)  Financial  Statement  Submitted  to  Bank  by  Borrower  {second  page) 


ANALYSIS  OF  BORROWERS'  STATEMENTS  23 

for  Contingent  Liabilities  is  provided,  as  this  item  is  always  con- 
sidered by  the  loaning  bank  in  conjunction  with  the  liabilities 
outstanding.  The  section  provides  for  the  reporting  of  the  na- 
ture of  the  original  transactions  out  of  which  the  contingent 
liabilities  have  arisen. 

The  Profit  and  Loss  and  Surplus  accounts,  in  so  far  as  pos- 
sible, should  be  transcripts  from  the  books.  In  some  cases  it 
may  be  necessary  to  total  some  of  the  details  reflected  in  the 
books,  but  the  information  thus  given  should,  nevertheless,  ad- 
here strictly  to  the  data  in  the  accounts,  as  otherwise  these 
accounts  will  not  prove  with  the  remainder  of  the  statement  or 
with  statements  previously  rendered,  and  will  cause  an  unfavor- 
able impression  and  make  necessary  further  questioning  upon 
the  particular  points.  Care  should  be  exercised  to  have  the 
opening  balances  of  both  the  Profit  and  Loss  and  Surplus  ac- 
counts agree  with  their  balances  in  the  accounts  of  the  state- 
ments previously  rendered. 

A  memorandum  schedule  of  insurance  is  provided  to  show 
the  adequacy  of  protection  against  every  kind  of  hazard. 

Schedule  i  (see  lower  part  of  Form  ib)  combines  Cash,  Notes 
Given  for  Borrowed  Money,  and  LiabiUty  for  Acceptances  under 
Letters  of  Credit.  The  schedule  is  so  arranged  as  to  present  the 
name  of  the  bank  with  which  the  cash  is  deposited  and  the  bal- 
ance at  statement  date;  the  line  of  credit  received  from  the  bank; 
the  amount  owing  the  bank  on  statement  date,  divided  between 
notes  and  acceptances;  and  finally  what  security,  indorsements, 
or  guaranties  have  been  given.  If  any  notes  are  placed  with 
note-brokers  to  be  sold  in  the  open  market,  this  fact  should  also 
be  entered  in  the  lower  part  of  the  schedule. 

Schedule  2,  Notes  and  Accounts  Receivable,  shown  on  page 
3  of  the  financial  statement  (see  Form  ic)  divides  these  items  in 
separate  columns  between  trade  and  other  debtors.  The  trade 
total,  being  considered  quick,  should  agree  with  these  items  in- 
cluded under  Quick  Assets  on  the  balance  sheet.  The  remainder 
necessarily  would  be  reflected  under  the  head  of  Invested  Assets 


24 


ACCOUNTING— THEORY  AND  PRACTICE 


SCHEDULE  2     NOTES  AND  ACCOUNTS  RECEIVABLE 


DUE  FROM  TRADE  DEBTORS  <Not  including  any  itcoi  m  "Other  Dvblora") 

For  Merctundiit  SolJ    ipon  Krgular  Trrmi 

Account*  RecelMbl*  over  Six  MontK»X)ld  or  Past  Due  Noici 


Own  Srllinc  >louics  or  Bruchri 

Subsidiary  Corporaiioni 

Allied,  Contfolled  or  Affiliated  lotercsts 

For  Capita]  Slock  Sold 

For  Merchandite  on  Consignmcat 

Cash  Advanrei  (Security  TTiercfor  i(  Any  $ 

Commiiiions  Due  and  Payable 

Other  Account!  and  Notes  Receivable 


io 


Le«  Rcservei  Created  to  Cover  Possible  Di* 


What  Amount  of  Accounts  or  Not 


TOTAt  AS  fEll 


FJvablf  has  been  Discounted  or  Pledged* 


455 


J^6    768     09 


SCHEDULE  3.  INVENTORY  (Should  be  ttkeii  >t  coat  or  (urkct  price  -  whichever  U  lower) 
SI  December 19  gQ Bv      Richard  Roe 


Finished  Merchudjsc 

(How  Priced* 

Mkt.                                 ) 

Nfrtchwdise  io  proccii 
Raw  Mauiial 

t  "        " 

Cott                                  ) 
Coat                                  ) 

Supplies,  etc 

Other  Itcmt  locluded  ia  laveotory 

Leu  Reserve  ftod  AJIowaoce  for  Merctundise  of  Obsolete  Pattern  or  Othcrwite  not  Readily  Saleable 

What  Amount  ii  held  by  you  under  Truil  Reeeiptr 

What  Amoual  do  you  hold  on  Conii|rnmen(  (Included  io  lOTentoryO 

What  Amount  ha*  been  Pledged  as  CoUaienl  for  Loaoi  or  Advaaces? 

What  Amount  has  been  priced  at  more  tliaa  Cottf 

What  u  Amount  of  Unfilled  Orders  on  Hasdr 


TOTAL  AS  rn  BALANCC  SUET 


r  rLEDCEO 


Liberty  Bonds         Hh  «H 

Victory  Notes  ^H 

A. B.C.  Corporation        Stock 
D.  &  R.  Distributing  Co,    •• 


S 
S 

90 
300 


25  000 


SCHEDULE  S    DEPOSITS  OF  MONEY 


Jm'iic  Doc 
Ethel  Hoc 
John  Smith 
Alfred  Jones 
Robert  Roc 


I  lALANCSSKrar 


Form  I.     (c)  Financial  Statement  Submitted  to  Bank  by  Borrower  {third  page) 


ANALYSIS  OP  BORROWERS'  STATEMENTS  2$ 

in  the  balance  sheet.  The  various  items  in  this  schedule  present 
a  fair  idea  as  to  what  is  slow  and  not  to  be  included  in  working 
capital,  so  far  as  notes  and  accounts  receivable  are  concerned. 
As  this  schedule  clearly  indicates,  all  notes  and  accounts  receiv- 
able are  not  looked  upon  in  the  same  light  by  the  banker.  They 
should  therefore  not  be  lumped  and  thrown  into  the  balance 
sheet  in  one  item  as  is  so  frequently  done.  Any  reserve  provided 
for  the  receivables  should  be  deducted  from  the  total  of  the 
schedule  and  only  the  net  amount  should  be  carried  to  the  balance 
sheet  under  Quick  and  Invested  Assets,  according  to  the  classi- 
fication and  distribution  of  the  schedules. 

The  inventory,  shown  in  Schedule  3,  should  be  taken  at  cost 
or  market  price,  whichever  is  lower,  which  in  turn  should  not  be 
difficult  to  remember  in  these  days  of  the  income  tax.  The 
:schedule  divides  the  merchandise  into  the  various  stages  of  com- 
pletion, allows  for  the  item  of  Supplies,  which  is  not  always 
considered  as  a  good  merchandise  item  to  be  classed  as  a  quick 
asset.  The  exact  status  of  the  merchandise  is  also  required,  i.e., 
whether  it  is  pledged  in  any  manner,  is  on  consignment,  or  is  out 
on  a  trust  receipt.  Any  reserve  provided  for  merchandise 
should  be  deducted  in  this  schedule,  and  the  net  amount  of  the 
item  carried  to  the  balance  sheet,  as  in  the  case  of  notes  and 
accounts  receivable. 

Schedule  4,  Investments,  is  a  list  of  all  investments  held,  such 
as  marketable  securities  or  stocks  jr  bonds  of  subsidiary  com- 
panies. It  gives  a  description  of  each  security,  the  number  held, 
amount  pledged  for  loans,  if  any,  the  par  value,  and  the  amount 
at  which  the  security  is  carried  upon  the  books,  with  the  yield, 
either  interest  or  dividend,  per  year. 

Schedule  5,  Deposits  of  Money,  is  a  list  of  money  deposits 
accepted  as  loans,  with  the  agreements  under  which  the  deposits 
have  been  received  and  a  description  of  the  security  given. 

Schedule  6,  Accounts  Payable  (see  Form  id),  is  itemized  to 
show  the  nature  of  the  account,  but  this  does  not  affect  the  distri- 
bution of  the  items  between  the  current  or  short-term  liabilities  or 


26 


ACCOUNTING— THEORY  AND  PRACTICE 


SCHCOULE  •  .  ACCOUNTS  PAY  ABLE 


For  MmhudiM  PtudUMd  upos  XcgvUr  Tcrmi,  Not  Due 
«i  (•  «•  i«  .•  tt      Put  Due 

Due  OSccfi,  Directors  SlocUwUen  or  Enploycea 
Other  Accoual*  Paykhlr 


iCiitDilH.  7  ■  iWbtt)  bt&t  lUer.1  fteeere.  Bwk  Rtvln^tM)' 


490 


480 


60 


Ftrfi  Mortnage 


150  000 


125  000 


SO  000 


SJtftS     I  ^     Uvme  Truu  <£  Saving  Bk. 


*Upoa  whu  AiMts  ire  tbe  ibotrc  deieribcd  Boada  e  lies  t 
Provitioa  for  RetireaicM 

SCHEDULE  »  •  REAL  E5TATE       (Pl«.««  ti»«  larticuhre  rf  ^A  p»re.l) 


Factory  Site 
Buildingt  of  Plant 


Lang  Uland  City 
do 


Doe  &  Roe  Corp. 
do 


I  tALAKCf  S 


000 
000 


375      000       50     OOP     325      OOP 


000 


VElRtFlCATION  U  your  bookj  hare  been  andtud  hy  a  Certified  Public  AccounUBl  lUtc  hia  a*m« 

ud  date  of  Audit        Byrnes  &  Baker  SI  December  I9tO 

CHARACTER  OF  BUSINESS    (PWanl  tUmrwm  Buk  R«quirM.«.l) 

Describe  bnefly  the  chanctcr  el  Buiincu  you  conduct     Cenerat  Mercantile  da  Manufacturing  cf 


PURPOSE  OF  BORROWING 


(P«Jaf»l  IUmtt*  Bank  IUq«ir«ni«iil) 


Sute  whether  the  proceeds  of  Loam  applied  (or  or  lo  be  applied  for  are  to  be  itted 

(A)  For  Invesiincnt  ia  Securities,  Laodi,  Plantt,  Buildingi,  Machinery,  ImpiovcmcMl  or  Eq^ipfiw*^ 

(B)  In  the  Production,  Manufacture  and  Diithhution  of  Commodttiet  of  AfncuJturr,  I^idustry  or  Commcfei 
MAXIMUM  AND  MINIMUM  LIABILITIES 

When  JIdrour  Liabilitiei  reach  their  Maaimura  la«C  r^ar  St  January  19  gQ     Anotnt  I  l»^00,000 

■        •    Minimum    '•    •*  SI  Auguat  ^^$0,  «      %       300,000 

Ha»e  any  of  jour  Accoudu  beta  A«(igaed  or  Amcu  Pledged  or  u  ihcnuy  Lies  opOQ  ikem  etwpt  M  ogttd  atQrfl  f 

No 


N.B.    hi 


STATE  OF  IVew  Yorh  I  

COUNTY  OF     N.  y.      j*''  ^  ^_ 


— —.«■  being  duly  mom  drpem  aad  iijf||  As 
Doe  &  Roe  Corporation 


the  Cofpontii 
OB  the ^ 


who»e  (inanctal  iittemeftt  appean  above,  that  he  (if^rd  the  said  rtaiement  after  reading  H 
u  in  all  mpccti  a  (uU,  true  *nd  iccuralc  itatement  erf  the  financial  cooJilwa  of  uid  Corpora 

_  j.y  ^ December 


i(  erf  the  financial  cooJili 
-19  to    8«rora  to  before  me  tlus- 


f  ibe  accompanyioK  whcdtdei^ 


Edward  Towneend 


Form  I,     (d)  Financial  Statement  Submitted  to  Bank  by  Borrower  {fourth  page) 


ANALYSIS  OF  BORROWERS'  STATEMENTS  27 

indebtedness,  and  the  long-term  liabilities,  which  is  determined, 
as  has  been  stated,  by  the  maturity  dates  of  the  items. 

Schedule  7,  Bonded  Debt,  is  an  explanation  with  details  of  the 
outstanding  bonds,  if  any. 

Schedule  8,  Real  Estate,  is  a  list  of  the  firm's  or  corporation's 
real  estate  holdings,  showing  the  equity  held  in  the  properties. 

Comparison  Sheets 

When  the  bank  receives  from  the  borrower  the  statement  out- 
lined above,  the  items  are  transferred  to  a  comparison  sheet 
(Form  2),  which  allows  space  for  the  comparison  of  about  five 
periods.  To  arrive  at  the  amount  of  working  capital  the  current 
or  short-term  liabilities  are  placed  directly  under  the  quick  assets. 
(See  Form  2 .)  The  items  under  these  heads  are  in  much  the  same 
order  as  on  the  sheet  filled  out  by  the  applicant  or  borrower. 
They  are  totaled  and  a  difference  taken.  Assuming  the  quick 
assets  to  be  in  excess  of  the  current  liabilities,  the  difference  is  the 
amount  of  working  capital  used  in  the  business.  The  ratio  of 
the  quick  assets  to  the  current  liabilities  is  calculated  upon  the 
dollar  basis,  giving  the  number  of  dollars  and  cents  of  quick 
assets  on  hand  to  meet  every  dollar  of  the  current  liabilities. 

The  invested,  fixed,  and  other  assets,  or  what  are  sometimes 
called  "permanent "  assets,  are  next  listed  and  brought  down  to  a 
total.  These  assets  are  offset  by  the  "other"  or  long-term  lia- 
biUties,  in  which  are  included  the  reserves  for  the  invested  assets. 
The  excess  of  the  invested,  fixed,  and  other  assets  over  the  long- 
term  liabilities  is  determined,  and  again  a  ratio  is  calculated 
showing  the  number  of  dollars  of  permanent  assets  to  meet  one 
dollar  of  long-term  liabilities. 

The  reserves  for  all  the  working  assets  are  deducted  on  this 
sheet  from  the  gross  amount  of  the  assets  to  which  they  apply, 
leaving  a  net  amount  which  is  used  in  the  comparison  sheet, 
whereas  reserves  affecting  the  invested,  fixed,  and  other  assets 
are  set  up  separately  with  the  long-term  liabilities,  thus  permit- 
ting the  total  of  original  investments  to  be  stated  upon  the  com- 


28 


ACCOUNTING— THEORY  AND  PRACTICE 


—"■ 

■"■■■ 

— 1 

Comparison  o(                      NAMF        ^«  * «"«  ^flrpora.«» 
P.^mI-^^^^                               AssceandUabilitic,                                   M^cantifc  *  Afa„«/a«t„rt^ ./ 

BANK.                                                                 CORPORATE  FORM                           BUSINESS- 1 . Z-JL^ 

.vrTiu*.M.mn.«m.v...-oc.p.T.. 

z>fc.  «i,  /a?o  1                   1 

!l 

INou*  Recfiviblc 
i  t  /Accyunti  Reicivible— Lew  RcMfvf, 

lubrTty  Bondi-Equity. 
^            Total  Quiffc  Aiieti, 

54 

35 
281 
558 
6 
939 

055 
000 
995 
740 
000 
790 

25 
05 

30 

/Noifi  Payible  — Bankj, 

1  Notci  P»y«blf-Oth<r», 

lAcccpurcr*  Payable, 
.    a     jAccounU  Payable. 
2  t    /Accrued  Itemj, 
;  5  \ljons  Trrm  lAdeWi*«uMituring. 
'^  ^    Joue  w  AIliH.  Controlled.  Affil  ,  &  Sub,,  Co*»  . 

1  Deposits  of  Money 

\            Toil]  Cutrent  Li*bililiei, 

250 
i2 
iO 

i90 
75 

150 
(047 

000 
050 
000 
i80 
000 

000 
530 

60 
60 

'■ 

EXCKSS-CIKRENT  L, 

107 

7iO 

SO 

RATIO 

89 

/  Lind  aod  Buildings— PUnts, 
1  Macliincrf,  Equipm«r>t  and  Fixture*. 
^  I  Trade  Muks,  FormuU,  Goodwill.  Etc., 
£  J   IDue  from  Allied.  Conirolled,  AHil  ,  4  Sub.,  Cot 
'-  .,   /Due  from  Sloe Itholdert,  Officers  aod  Emfjloycs. 
^  z  \ Advances,  Louu.  Depo«it«,  Etc.. 
«  °    jSijpi>liei,  Samples.  Etc, 
-  ?  /Deferred  Claries, 

19 

375 

265 

200 

128 

7 

IDS 

10 

9 

1118 

000 
000 
000 
000 
971, 
340 
458 
200 
940 

913 

_ 

08 
96 
65 

69 

i  ^  /r.  E.  Monffages,  Booed  Debt,,  Etc. 
5  ^  VReieii^e— Derreciation  of  PUol  Piopcriy, 

£  ;  /              Machinery,  Equxpmentf  Fixt, 
.  _,   1  Deposits  of  Money 
2  <  1  Special  Keserve 

^              T:U\  Other  Liabiliiiei  and  Ret^tvet. 

175 

15 
100 

60 
350 

000 

000 
000 
000 
000 

_ 

E\(  ESS-INVESTFD,  FIXED.  ETC. 

768 

913 

59 

1 

RATIO 

3 

,20 

1 

;:  '  jCapJiiI  Stock  OuutaudinK, 

^  ]  j  want 

Totil  Cipltal  Accouw. 

1000 
SS8 

661 

000 
826 
173 

61 
39 

I 

/                                    ASSETS 

;    )      Toui, 

939 
ills 
f058 

790 
913 
70S 

30 
69 
99 

A;unrnlLi.bililin. 

Lai^iiil  Acccuni  (Net  Woflh), 
Tot.l. 

lOi? 
350 
661 

i058 

530 
000 
173 
703 

60 

39 
99 

. 

Noifi  Rfceiv^blf-DIwrouBted 

25 

000 

- 

1 

^ar  D^/rf(/j  /*/rj,v  Turn  0-w 

Form  2.     Bank's  Comparison  Sheet  of  Borrower's  Assets  and  Liabilities 


ANALYSIS  OF  BORROWERS'  STATExMENTS 


29 


COMPARISON    OF                                                       \AME 

National                 in'come  and  capital  account 

Bank                                CORPORATE  FORM                                PrSTNF<^<5 

pEBIOD-NLi<BER  MONn.S 

PERIOD-EVDEn 

\ 

INCOME  account 
Net  Sales, 

Increase  ( BUck)  Decrease  ( Re.1  )-I'er  Cent. . 
Co«  0/  Sales, 

Gross  Profit  on  Sales- Per  Cent., 
Kxpeoses  and  Other  Clwrges, 
Net  Profit  from  Operations, 
Net  Profit  on  Sates-Per  Cent., 
Other  Income. 
ToUl  Income, 
Less-Cash  Dtridenclf, 

Balance  tran*fe/re<l  lo  Surptiis, 

CAPITAL  ACCOUNT 
Siirph..: 

Balance  transferred  from  Income  Account. 

Other  Aaditions, 

Surplus-  B«gi  nn  inf, 
ToUl. 

Dcductioaa>Stock  Divulemls, 

Other, 

Sar  plus- Ending, 

Revaluation  of  Assets-Net, 

Hook  Surplus-Per  Balance  Sheet. 
Capital  Stock-Oatstandiagt 

Orijtiual  and  Dividend  Israel. 

New-F»r  Cash  or  Bquivalenl, 

Net  Worth. 

OTHER  DETAIL 
Average  Sales. Per  Month, 
Average  Operating  Expenditures  Per  Month, 
Average  Cost  of  Mdae.  Used-Per  Month, 
Estimated  Minimum  Quick: 

Cash. 

Receivables, 

Merc  hand  iw. 

Total  Estimate  Minintnm  Quick 
Snlariea  of  Officials  during  Abo\-e  Period, 

Form  J.     Bank's  Sheet  for  Comparison  of  Income  and  Capital  Account 


30        ACCOUNTING— THEORY  AND  PRACTICE 

parison  sheet.  These  reserves  are,  of  course,  in  the  nature  of 
depreciation  or  valuation  items. 

The  Capital  account  is  next  listed  on  the  comparison  sheet, 
showing  only  two  items,  Capital  Stock  Outstanding  and  Surplus. 
When  the  statement  shows  a  deficit  instead  of  a  surplus,  the 
figure  is  placed  opposite  the  word  "Surplus"  but  written  in 
red. 

The  summary  consists  of  the  totals  effected  as  shown  above, 
with  the  amount  of  the  quick  and  invested  assets,  the  total 
of  which  agrees  with  the  total  of  the  liabilities,  reserves,  and 
capital. 

A  line  is  allowed  for  the  entering  of  notes  receivable  discoimted 
or  contingent  liabilities. 

The  reverse  of  this  sheet  permits  of  the  verification  of  the 
notes  payable  so  far  as  the  particular  bank  is  concerned,  and  also 
the  noting  of  any  other  detail,  such  as  profit  and  loss  and  surplus, 
data  which  are  thought  to  be  of  interest  in  comparisons  when 
the  profit  and  loss  statement  is  not  placed  under  a  separate 
comparison  sheet. 

Other  sheets  are  used  for  making  the  following  comparisons: 
comparison  of  income  and  capital  account  (Form  3) ;  comparison 
of  excess  quick,  excess  slow,  and  net  worth  (Form  4),  and  bor- 
rower's statement  of  assets  and  liabilities  (Form  5). 

The  forms  given  here  are  all  used  for  the  corporate  form  of 
business  organization,  and  they  differ  from  the  firm  or  single 
proprietorship  forms  only  in  the  capital  accounts.  Inasmuch  as 
this  difference  is  of  minor  importance,  it  is  not  necessary  to 
illustrate  comparison  sheets  for  a  single  proprietorship  or  a 
partnership. 

Reasons  for  Analysis 

Now  what  is  the  reason  for  what  probably  seems  to  the  aver- 
age business  man  who  reads  a  detailed  description  of  this  pro- 
cedure for  the  first  time  to  be  an  amount  of  work  unwarranted  by 
the  result  achieved? 


ANALYSIS  OF  BORROWERS'  STATEMENTS 


31 


National 
Bank 

COMPARISON   l)F                                              k 

CORPORATE  FORM                                msivcss 

Ncl  Worlli  aiirt  How  1 

,ve.,., 

Increase 

Increase 

Decrease              ] 

Excess  Quick 
Hxttst  Slow 
No  Wonh 

Nd  Worll.  .nrt  How  Invrslfd 

Increase 

r)ecreap« 

Excess  Quick 
Excess  Slow 
Net  Worth 

Net  Worth  •uii  How  1 

v,.t,d 

Incriase 
Decrease 

Decrease 

Fxcesi  Quick 
Excess  Slow 

Net  Worth  «nd  How  Invesir.1 

Increase 
Decrease 

Decrease 

Ezce»s  Quick 
.  Excess  Slow 
Net  Worth 

Net  Worth  and  Mow  I 

uesl.d 

I  ,„„.a. 

II  Decrease 

\Zl^Zr 

E:Ke,s  Qu.ck 
Excess  Slow 
Net  Worth 

Net  Worth  anit  How  I 

Excess  Quick 
Excess  Slow 
.     Net  Worth 

vrstrd 

Decrease 

Decreas* 

Net  Worth  and  How  If 

1       Increase 
1       Decrease 

Dfcreas* 

Excess  Quick 
Excess  Slow 
Net  Wo«h 

Net  Worth  ind  How  Invested 

Increase 
Decrease 

Decrease 

Excess  Quick 
Excess  Slow 
Net  Worth 

Net  Worth  .nd  How  I 

VfStfd 

Increase 
Decrease 

Increase 
Decrease 

Excess  Quick 
Excess  Slow 
Net  Worth 

— 

Net  Worth  and  How  In 

vested 

Decrease 

Decrease 

Excess  Quick 
Excess  Slow 
Net  Worth 

Aon 

'•.     Retard  Hxtea  Aaed  over  Liabilitiei  in  Bteck  and  Com 
Record  Inert%ies  in  Black  nnd  Decrease  in  /fed 

Irn  in 

tilt 

Form  4.     Bank's  Comparison  Sheet — Borrower's  Excess  Quick  A  sets,  Excess 
Slow  Assets,  and  Net  Worth 


32 


ACCOUNTING— THEORY  AND  PRACTICE 


7 

BORROWER'S  STATEMENT  OF  ASSETS  AND  UABILITIES 

_ 1 

CORPORATE    FORM 

STATEMEr 

T   DATR5 

INCREASES 

PBCR BASES 

■~7 

19-- 

19— 

1 

QUICK  ASSETS 
Csib, 

Notes  Re«iv»ble. 

Accounli  Receivable,  L«s»  Re ser»M. 
Merchandise.  Lew  Reserves. 

( 

ToUl  Quick  Aueta, 

CURRENT  LIABILITIES 
Accounla  Payable, 
Notes  Payable.  B«nks. 

^ 

/ 

Noies  Payable.  Olber. 
Acceptances  and  Drafts  Payable, 
Long  Term  IndebtedocM  HatDriog, 
Accraed  Ilemt, 

\ 

Total  Current  LtabJlitiea, 
Excess,  Quick, 
Ratio, 
INVESTED.  FIXED  AND  OTHER  ASSETS: 

/ 

/ 

1 

/ 

( 

Investments. 

Land  and  Buildings,  Plant, 

Machinery,  Equipment  and  Fixtorei. 

Trade  Marks.  Formulacs.  Goodwill,  etc. 

Allied,  Controlled,  Affiliated  and  Sub.  Co's., 

\ 

Stockholders.  Officers  and  Employe*, 
Advances,  Loans,  Depoaits,  etc. 
Suppliea,  Samples,  etc. 
Deferred  Charges, 

Total  Invested.  Fixed  and  Other  A5sel% 
OTHER  LIABILITIES  RESERVES  &  CAPITAL  A/fc 
R.  E.  Mortgages,  Bonded  Debt.,  etc., 
Rfs<Tve  (or  Depreciation  of  Plant  Property, 

\ 

\ 

Allied.  Conirolled.  Affiliated,  and  Sub..  Co'a.. 

/ 

CapiUl  Stock  Outtfanding, 
Surplus, 

Total  Other  Liabilities,  Reaerves  and  Capital  A/c. 
ASSETS 

1 

\ 

Ja^-ested,  Fixed  and  Othera, 

LIABILITIES,  RESERVES  AND  CAPITAL 

Current  Liabilities 

1 

O'.ber  Liabtliiies.  Reserves  and  Capital  Account. 

Total, 

.... 

y 

Form  5.     Borrower's  Slatement  Sheet  of  Assets  and  Liabilities,  with  Comparisons 


ANALYSIS  OF  BORROWERS'  STATEMENTS  33 

In  the  first  place  it  should  be  noted  that  a  bank  may  loan 
money  as  follows : 

1.  It  may  loan  its  capital,  surplus,  undivided  profits,  and 
general  deposits,  subject  to  restrictions  as  to  maintenance  of 
reserves  and  to  limitations;  it  may  also  discount. 

2.  Its  loans  and  discounts  may  be  secured  or  unsecured,  time 
or  demand,  long-  or  short-term;  and  its  discounts  may  include 
acceptance  by  the  bank  of  notes,  drafts,  or  bills  of  exchange 
under  certain  restrictions  and  limitations. 

3.  The  law  imposes  no  limit  on  the  total  amount  a  bank  may 
accept  or  discount  for  one  person,  firm,  company,  or  corporation 
in  bills  of  exchange  or  drafts  secured  by  shipping  documents 
conveying  or  securing  title  to  goods  actually  shipped;  or  in 
demand  obligations  when  secured  by  documents  covering 
commodities  in  actual  process  of  shipment. 

4.  No  limit  is  placed  on  the  total  amount  the  bank  may 
advance  against  commercial  or  business  paper  of  other  makers 
to  any  one  person,  firm,  etc.,  provided  the  person,  firm,  etc., 
negotiating  the  loan  actually  owns  the  paper. 

All  of  these  fields  are  covered  by  a  bank's  loans  and  the  aggre- 
gate reaches  quite  a  sum.  And  in  providing  safeguards  for  the 
total,  the  various  component  parts  are  examined  and  passed 
upon  separately  as  they  are  made,  thus  insuring  for  the  entire 
amount  loaned  a  degree  of  safety  to  be  achieved  in  no  other  way. 

The  Purpose  of  Ratios 

The  first  question  that  a  banker  wants  answered  concerns  the 
liquid  condition  of  the  business  desiring  to  borrow.  How  much 
working  capital  does  it  employ?  What  is  the  ratio  of  its  quick 
assets  to  current  liabilities?  These  questions  are  answered  in 
the  comparison  sheets. 

The  ideal  ratio  between  quick  assets  and  current  liabilities  is 
2  to  I.  The  term  "ideal"  is  used  advisedly,. as  different  condi- 
tions and  situations  tend  to  make  it  impossible  for  every  business 
undertaking  to  show  a  2  to  i  ratio  on  their  financial  statement. 


34  ACCOUNTING— THEORY  AND  PRACTICE 

The  ideal  rat'o  means  that  the  business  is  in  a  good  financial 
condition  so  far  as  the  working  capital  is  concerned.  Therefore, 
some  concerns  having  customarily  a  lower  ratio  than  2  to  i 
nevertheless  are  in  a  very  healthy  state  when  all  the  factors  are 
considered.  Among  these  factors  are:  nature  of  the  business, 
particular  season  for  that  business,  how  the  business  is  financed, 
amount  of  its  permanent  capital,  status  of  its  indebtedness  (when 
due).  If  the  working  capital  is  not  sufficient,  the  question 
arises  as  to  whether  the  loan  will  supply  the  deficiency  and 
whether  the  ratio  is  large  enough  to  take  care  of  the  additional 
indebtedness  to  be  incurred  by  borrowing  from  the  bank. 

These  questions  lead  to  an  inspection  of  the  items  listed  under 
Quick  Assets  to  determine  the  following  points : 

1.  Is  there  sufficient  actual  cash  to  meet  indebtedness 
maturing  immediately? 

2.  Are  collections  sufl&ciently  prompt  to  furnish  additional 
cash  as  required? 

3.  What  is  the  merchandise  turnover?  How  many  months' 
supply  of  merchandise  is  on  hand?  Is  it  adequate,  or  is  it  exces- 
sive, requiring  more  money  to  carry  it  than  is  warranted? 

4.  If  the  merchandise  item  is  heavy,  what  is  the  cause?  Is 
it  the  carrying  of  obsolete  merchandise  in  the  hope  of  finding  a 
market?  Is  it  overbuying  on  a  rising  market  and  holding  after 
the  peak  has  been  reached?  If  such  a  condition  obtains,  what  is 
the  possibility  of  disposing  of  the  merchandise  and  at  what  prices? 

Use  of  Ratios  in  Appraising  Quick  Assets 

To  determine  some  of  the  above  points,  ratios  are  relied  upon, 
such  as  sales  to  receivables,  in  order  to  ascertain  the  number  of 
months  the  receivables  are  outstanding  as  based  upon  average 
monthly  sales,  and  thereby  determine  the  promptness  of  col- 
lections; and  sales  to  merchandise,  to  determine  merchandise 
turnover,  based  ajgain  on  average  monthly  sales  (at  cost)  to 
determine  number  of  months'  merchandise  supply  on  hand,  which 
will  quickly  reflect  any  heavy  merchandise  condition.     Some- 


ANALYSIS  OP  BORROWERS'  STATEMENTS  35 

times,  if  it  becomes  a  factor  due  to  the  conditions  presented  by 
the  statement,  the  ratio  of  receivables  to  merchandise  is  ascer- 
tained upon  the  monthly  basis  to  determine  the  extent  of  the 
profit  reflected  in  receivables,  which  may  not  materialize  quickly 
if  collections  are  not  prompt. 

At  this  point  it  may  be  mentioned  that  in  some  cases  at  least, 
if  not  in  all,  the  average  merchant  is  too  lenient  in  his  calcula- 
tions of  the  cost  of  carrying  obsolete  stock.  It  is  thought  that 
if  the  actual  charges  of  carrying  such  merchandise  were  placed 
against  the  item  definitely  by  opening  an  account  for  this  purpose, 
the  inadvisability  of  carrying  merchandise  for  an  undue  length 
of  time,  owing  to  the  expense  incurred,  would  be  brought  quickly 
and  forcibly  to  the  attention  of  the  responsible  executives.  This 
need  only  be  a  memorandum  account,  although  the  unsatis- 
factory nature  of  such  an  account  is  admitted;  however,  for  this 
purpose  an  exception  may  be  made  and  the  proportionate  share 
of  interest,  rent,  and  various  other  charges  applying  thereto 
correctly  set  forth.  The  profit  which  might  have  been  made 
upon  the  normal  turnover  of  merchandise  having  a  ready  market 
for  the  period  during  which  the  obsolete  stock  has  been  held,  is 
also  to  be  considered  in  this  connection. 

Another  method  by  which  a  bank  detects  the  carrying  of 
obsolete  merchandise  is  by  observing  whether  the  borrowings 
are  steady  and  continuous.  This  information  is  outside  of  the 
financial  statement,  being  a  part  of  the  bank's  record  of  experi- 
ence with  the  item  in  question.  It  is  considered  very  impor- 
tant by  the  bank  for  purposes  of  reference.  It  must,  however, 
be  stated  in  this  connection  that  "steady"  borrowing  is  not 
always  a  positive  indication  of  obsolete  merchandise.  As  a 
matter  of  fact  such  borrowing  is  generally  due  to  insufiiciency  of 
capital. 

Nature  of  Quick  Assets 

The  quick  assets  should  include  only  those  which,  through 
the  regular  operation  of  the  business,  practically  automatically, 


36  ACCOUNTING— THEORY  AND  PRACTICE 

and  within  a  reasonable  time,  say  90  to  1 20  days,  will  be  turned 
into  cash;  the  exception  being  Liberty  bonds,  as  heretofore 
noted. 

The  reasonable  time  in  any  particular  case  depends  upon  the 
terms  of  the  trade  or  those  extended  or  received  by  the  particular 
undertaking.  This  period  becomes  the  basis  for  determining 
whether  or  not  the  accounts  outstanding  exceed  the  amount  for 
which  credit  should  be  granted  by  the  concern. 

It  is  also  well  to  know  that  adequate  insurance  is  carried  upon 
the  merchandise  inventory  or  stock,  and,  if  this  information  is 
not  presented,  inquiry  should  be  made  with  regard  to  it. 

Claims  of  any  nature  whatsoever,  or  accounts  in  dispute, 
judgments,  and  like  items,  must  not  be  included  in  the  quick 
assets  but  must  be  shown  under  a  separate  title  in  the  section 
provided  for  the  invested,  fixed,  and  other  assets. 

When  any  doubt  exists  as  to  the  liquidity  of  the  accounts 
receivable,  they  should  be  examined  and  "aged,"  that  is,  classi- 
fied, according  to  the  terms  granted  to  customers.  Those 
exceeding  the  limit  of  the  terms,  plus  a  fair  leeway  to  allow  col- 
lections to  arrive  and  postings  to  be  made,  should  be  excluded 
from  the  quick  assets.  At  such  a  time  the  claims,  etc.,  can  also 
be  eliminated. 

Assets  Used  as  Collateral 

Before  leaving  the  quick  assets  it  should  be  noted  that  any 
pledged  items  have  no  place  in  this  division  of  the  balance  sheet. 
This  refers  particularly  to  Notes  and  Accounts  Receivable,  as 
the  Liberty  Bond  item  receives  separate  treatment.  Any 
amounts  so  pledged  should  be  deducted  from  the  total  of  the 
item  and  included  among  the  permanent  assets  until  released. 
This  treatment  necessitates  the  showing  of  the  liability  and  is  to 
be  preferred  to  the  omitting  of  both  items,  for  which  there  does 
not  seem  to  be  any  defense  although  it  is  practiced  to  some  extent. 
The  former  treatment  clearly  depicts  the  actual  status  of  the 
account  and  does  not  lead  to  incorrect  inferences. 


ANALYSIS  OF  BORROWERS'  STATEMENTS  37 

Nature  of  Current  Liabilities 

Current  liabilities  can  easily  be  interpreted  to  be  those  falling 
due  within  one  year  from  the  date  of  the  statement.  Hence, 
every  indebtedness,  irrespective  of  its  nature,  coming  under  this 
category  will  be  considered  current  and  as  an  offset  to  quick 
assets. 

Any  proportion  of  long-term  indebtedness  which  matures 
within  a  year  from  the  date  of  the  statement  is  included  among 
the  current  liabilities,  in  so  far  as  ways  and  means  must  be  pro- 
vided to  meet  this  indebtedness  in  the  current  period.  An  illus- 
tration of  such  an  item  would  be  an  issue  of  serial  bonds,  a  certain 
amount  maturing  each  year  beginning  with  a  certain  date.  That 
proportion  of  the  issue  the  maturity  of  which  would  fall  within 
one  year  of  the  statement  date,  would  be  included  among  the 
current  liabiHties. 

Notes  Payable — Banks  are  investigated  to  ascertain  the  ex- 
tent to  which  the  lines  of  credit  with  the  various  banks  have  been 
used.  The  date  of  maturity  also  plays  an  important  part  as 
funds  will  be  needed  to  pay  off  the  notes  when  due  or  arrange- 
ments for  renewal  have  to  be  made.  This  is  sometimes  the  dan- 
ger signal.  When  it  is  not  desirable  to  renew  at  the  banks,  the 
necessary  funds  must  be  provided  from  other  sources  and  an 
inspection  at  date  of  statement  will  serve  as  a  forewarning  of 
what  action  should  be  taken. 

The  amount  of  Accounts  Payable  outstanding  is  very  interest- 
ing as  it  shows  the  amount  of  liquid  funds  which  must  be  made 
available  for  meeting  this  indebtedness.  As  with  the  accounts 
receivable,  the  number  of  months'  business  outstanding  and 
unpaid  at  the  date  of  the  statement  is  of  particular  interest. 
This  is  determined  by  arriving  at  an  average  monthly  purchase 
figure  and  dividing  the  accounts  payable  by  that  amount.  Of 
course,  if  this  figure  develops  a  condition  which  shows  that 
several  months'  purchases  in  excess  of  time  allowed  by  the  terms 
of  purchase,  plus  a  fair  leeway,  are  outstanding,  it  is  cause  for 
further  inquiry,  and  perhaps  a  detailed  examination. 


38        ACCOUNTING— THEORY  AND  PRACTICE 

Especially  at  this  time  is  the  item  of  Acceptances  Pay- 
able of  particular  interest.  Whenever  possible,  full  details 
concerning  the  item  are  requested  to  establish  what  foreign 
countries,  if  any,  are  involved,  the  nature  of  the  transactions 
covered,  and  the  form  of  the  financial  arrangements,  whether 
under  letters  of  credit  and  what  kind,  and  if  there  is  any  un- 
used portion  of  the  letters  of  credit  outstanding,  what  the 
likelihood  is  of  the  balance  being  drawn  against  in  the  near 
future. 

Accrued  Items  are  invariably  due  within  a  short  time  of  their 
calculation,  and  are  consequently  considered  part  of  the  current 
liabilities. 

The  amount  due  to  allied,  controlled,  affiliated,  and  sub- 
sidiary companies  is  considered  a  current  liability,  as  the  re- 
quest for  the  payment,  even  though  not  in  keeping  with 
the  terms  under  which  the  money  was  loaned  or  the  purchase 
made,  would  ordinarily  be  met,  especially  if  the  company 
making  the  statement  was  the  parent  concern.  The  only 
question  that  would  arise  in  this  connection  is  the  existence 
of  a  written  agreement  providing  for  payment  some  time  in 
the  future  and  more  than  one  year  from  the  date  of  the  state- 
ment. 

What  appears  to  be  an  inconsistency  is  the  inclusion  of  the 
amount  due  to  allied,  controlled,  affiliated,  and  subsidiary  com- 
panies as  a  current  liability  and  the  inclusion  of  the  amount  due 
from  these  companies  among  the  invested,  fixed,  and  other  assets 
or  the  slow  assets.  The  reason  for  this  is  that  a  request  for  the 
payment  upon  the  part  of  a  subsidiary  company  would  be  im- 
mediately met  by  the  parent  company,  while  in  case  of  financial 
stringency  the  parent  company  would  be  rather  lenient  in  collect- 
ing amounts  due  it  from  its  subsidiary.  In  other  words,  when 
this  method  of  financing  companies  is  resorted  to,  it  is  not  dis- 
cernible by  an  inspection  of  the  balance  sheet  whether  the  terms 
of  the  agreement  under  vy^hich  the  debt  was  contracted  have  been 
extended. 


ANALYSIS  OF  BORROWERS'  STATEMENTS  39 

Invested,  Fixed,  and  Other  Assets 

From  the  viewpoint  of  the  credit  analyst,  assets  grouped  as 
the  Invested,  Fixed  and  Other  Assets  present  very  many  aspects 
and  features  common  to  all.  They  often  raise  questions  of 
policy  with  regard  to  depreciation,  amortization,  appreciation, 
mortgages,  ownership,  protection,  and  improvement. 

Real  Estate,  or  Land  and  Buildings,  should  be  shown  gross, 
with  the  mortgage,  if  any,  as  a  deduction,  or  as  a  separate  item 
among  the  liabilites  if  the  form  illustrated  before  is  used  for  the 
report.  However  stated  on  the  report,  the  gross  value  of  the 
assets  and  the  mortgage  against  it  are  entered  separately  on  the 
comparison  sheet  in  order  to  show  the  fluctuations  from  year  to 
year  or  between  accounting  periods.  The  proper  amount  of 
insurance  should  be  carried  and  so  reported.  Depreciation  is 
also  entered  separately  under  the  long-term  liabilities.  These 
two  items,  the  mortgage  and  depreciation,  form  the  principal 
items  under  the  long-term  liabilities  section  of  the  comparison 
sheet.  The  above  division  of  the  Real  Estate  item  readily  indi- 
cates upon  the  comparison  sheet  the  policy  or  lack  of  policy  of 
the  concern  with  regard  to  depreciation.  The  amount  of  depre- 
ciation should  be  adequate.  Also,  increases  should  be  clearly 
shown,  so  as  to  indicate  whether  all  improvements  are  capitalized 
or  only  the  additions;  also  whether  the  increase  is  due  to  appre- 
ciation, and,  if  so,  upon  what  basis  the  appreciation  was 
calculated  and  authorized ;  whether  or  not  fair  and  conservative. 

Machinery  and  Fixtures 

The  item  of  Machinery  and  Fixtures  is  treated  on  the  com- 
parison sheet  in  very  much  the  same  manner  as  Land  and  Build- 
ings. The  questions  raised  in  regard  to  Land  and  Buildings 
apply  just  as  effectively  to  this  item.  Of  course,  the  percentage 
of  depreciation  will  most  likely  be  higher,  and  the  fluctuations 
greater  from  year  to  year.  An  additional  point,  however,  is  the 
matter  of  obsolescence,  for  which  due  allowance  must  be  made 
in  the  depreciation  item.    Any  mortgage  on  machinery  or  fix- 


40  ACCOUNTING— THEORY  AND  PRACTICE 

tures  would  be  a  chattel  mortgage  which  is  not  classed  with 
mortgages  on  buildings  Such  a  mortgage  would  immediately 
raise  suspicions  as  to  the  borrower's  financial  condition. 

Trade-Marks,  Patents,  and  Good-Will  are  always  susceptible 
to  large  yearly  deductions  for  depreciation  or  amortization,  and 
the  banker  generally  looks  for  such  reductions  when  scanning 
the  item.  The  worth  of  these  items  is  in  most  cases  entirely 
dependent  upon  the  business  being  a  going  concern  and  has  little 
real  value  to  an  undertaking  in  liquidation.  Consequently,  a 
conservative  pohcy  calls  for  a  reduction  of  these  items  and  a 
gradual  elimination  of  them — as  much  as  the  business  will  bear, 
Good-Will  is  at  best  only  set  up  during  a  change  in  ownership  to 
represent  the  intangible  values,  and  is  written  off  as  quickly  as 
possible  thereafter. 

The  difference  between  the  totals  of  the  invested,  fixed,  and 
other  assets  and  the  long-term  indebtedness  should  reflect  a 
sufficient  amount  of  capital  investment  upon  the  part  of  the 
owners  to  give  assurance  of  the  permanency  of  the  undertaking. 
The  commercial  banks,  meaning  thereby  the  national  banks,  or- 
dinarily will  not  loan  funds  to  be  placed  in  any  of  these  classes  of 
assets  for  reasons  which  are  obvious  in  view  of  the  explanations 
made  in  connection  with  the  other  balance  sheet  items.  The 
ratio  between  fixed  assets  and  long-term  liabilities  is  not  looked 
upon  as  quite  so  important  as  the  one  showing  the  working  posi- 
tion, but  it  is  nevertheless  considered  important  as  showing  from 
year  to  year  the  relative  position  of  the  concern  with  regard  to 
its  permanent  assets. 

Importance  of  the  Capital  Account 

The  Capital  account  does  not  present  any  special  problem, 
provided  sufficient  particulars  are  submitted  to  permit  an  in- 
telligent reading  of  the  item.  Various  ratios  are  based  upon  the 
capital  item,  viz. :  sales  to  capital  to  ascertain  the  capital  turn- 
over, which  should  not  be  confused  with  the  merchandise  turn- 
over heretofore  mentioned;  capital  to  fixed  assets,  to  show  the 


ANALYSIS  OF  BORROWERS'  STATEMENTS  4I 

proportion  of  capital  to  the  total  amount  so  invested ;  total  debt 
to  capital,  to  show  the  employment  of  outside  capital  and  any 
overextension. 

Overextension  exists  when  the  capital  is  exceeded  by  the 
debt,  and  its  seriousness  depends  on  the  amount  so  overextended. 
This  condition  places  the  creditors  practically  in  the  position  of 
co-owners  with  the  actual  proprietors  and  should  always  be 
given  prominence  in  any  comments  made  upon  the  balance  sheet. 
Some  bankers  insist  upon  including  with  the  liabilities  any  con- 
tingent liabilities  outstanding  and  then  deducting  the  total 
capital  investment  from  this  sum.  Naturally  this  method  shows 
a  condition  very  much  worse  than  the  first  method.  It  would, 
however,  seem  to  be  unfair  and  to  work  a  hardship  upon  some 
undertakings,  which  in  the  very  nature  of  their  business  must 
discount  acceptances  to  secure  the  cash  necessary  to  continue 
operations,  but  in  their  case  a  greater  ratio  is  allowed.  There  is, 
however,  a  certain  unfairness  in  charging  as  a  contingent  lia- 
bility an  acceptance  issued  under  a  confirmed  or  irrevocable 
letter  of  credit  which  has  been  discounted,  unless  this  fact  is 
taken  into  consideration  and  the  items  of  this  nature  deducted 
from  the  total  contingent  liability. 

Contingent  and  General  Reserves 

Contingent  and  general  reserves  are  considered  in  the  nature 
of  surplus  set  aside  for  emergencies  and  listed  in  the  section  pro- 
vided for  long-term  indebtedness  and  reserves  upon  the  compari- 
son sheet.  Unless  a  reserve  is  designated  to  apply  against  a 
specific  asset  it  is  considered  general,  and  is  the  result  more  often 
than  not  of  conservative  policy,  for  which  it  is  thought  the  bor- 
rower should  not  be  penalized  by  including  these  reserves  among 
the  current  liabilities.  In  the  final  analysis  there  is  little  to 
prevent  the  management  from  transferring  at  any  time  such  a 
reserve  back  to  the  Surplus  account. 

There  is  some  difference  of  opinion  among  bank  credit  men 
as  to  just  where,  on  the  comparison  sheet,  contingent  liabilities 


42  ACCOUNTING— THEORY  AND  PRACTICE 

should  be  placed.  The  form  submitted  herewith  provides  a 
space  at  the  bottom  of  the  sheet  clearly  marking  it  as  a  contingent 
liability.  To  the  accountant,  there  does  not  seem  to  be  any  other 
reasonable  handling  of  this  item.  However,  some  credit  men 
prefer  the  item  placed  with  the  current  liabilities,  claiming  that 
this  method  will  show  the  worst  possible  condition.  This  does 
not  appear  to  be  justified.  While  the  condition  shown  is  very 
much  worse  than  the  actual  and  the  risk  of  mistakes  in  granting 
credit  may  be  reduced,  such  a  condition  also  makes  it  possible 
to  err  in  not  granting  any  credit.  Such  refusal  may  lead  to  just 
as  serious  a  loss  for  the  bank  as  the  unwise  granting  of  credit. 
Therefore,  the  conclusion  is  that  the  fairest  presentation  is  the 
one  which  recognizes  contingent  liabilities  as  they  are  and  treats 
them  accordingly,  irrespective  of  the  resulting  effect  upon  the 
ratios  and  totals. 

The  financial  statement  lends  itself  to  figuring  numerous 
other  ratios  of  more  or  less  value,  but  the  ones  of  greatest  impor- 
tance are  those  already  mentioned,  which  are  recapitulated  here 
as  follows : 

Quick  Assets  to  Current  LiabiUties 
Receivables  to  Merchandise 
Capital  (Worth)  to  Fixed  Assets 
Sales  to  Receivables 
Sales  to  Merchandise 
Sales  to  Capital 
Debt  to  Capital 
Purchases  to  Payables 
Purchases  to  Merchandise 

Analysis  of  a  Corporation  Financial  Statement 

An  illustration  will  now  be  given  of  the  way  in  which  an  analy- 
sis for  credit  purposes  is  made.  The  data  used  will  be  found  in 
Forms  i  and  2.  The  first  part  of  the  following  material  shows  the 
type  of  mental  questioning  which  the  analyst  puts  to  himself  in 
regard  to  each  of  the  several  items. 


ANALYSIS  OP  BORROWERS'  STATEMENTS  43 

The  second  part  is  an  opinion  based  upon  the  evidence  pre- 
sented and  an  effort  to  prove  the  case  with  the  figures  in  a  slightly- 
different  manner  than  is  possible  upon  the  comparison  sheet.  To 
give  definitely  a  final  opinion  requires  the  absolute  knowledge 
upon  the  points  questioned. 

Examination  of  Separate  Items 

Cash,  $j8,ojj.2j.  The  cash  item  appears  somewhat  large  in 
view  of  the  excess  of  current  liabiHties.  If  a  good  portion  of  the 
cash  bal  ance  were  used  to  reduce,  say ,  notes  or  accounts  payable,  the 
ratio  would  be  bettered  to  the  value  of  $2  for  every  dollar  so  used. 

It  is  admitted  that  barely  20%  of  loans  is  deposited  with  the 
loaning  banks  and  that  the  banks  would  object  to  any  further 
reduction  of  the  cash  balance  if  their  claims  were  not  first  met. 

Notes  Receivable,  $jj,ooo.  The  circumstances  under  which 
these  notes  were  accepted  should  be  ascertained.  Is  it  a  custom 
of  the  trade  or  the  house,  or  were  the  notes  taken  in  settlement  of 
accounts  receivable?  In  case  the  latter  is  true,  what  are  the  ac- 
tual terms  of  sale  extended  to  such  customers  and  why?  If  notes 
were  taken  in  settlement  of  accounts  because  certain  customers 
were  naturally  slow  pay,  can  other  amounts  due  from  those  cus- 
tomers be  collected  easily?  If  this  method  of  settlement  was 
granted  because  of  extraordinary  circumstances,  to  what  extent 
would  such  circumstances  affect  this  class  of  business?  What  are 
the  maturities  of  the  notes. 

Accounts  Receivable,  $28i,ggj.oj.  Sales  for  the  period  average 
about  $196,000  per  month.  The  fact  that  accounts  receivable 
equal  only  about  i^  times  this  amount  would  indicate  either  a 
falling  off  in  sales  or  close  collections.  In  view  of  the  other  condi- 
tions it  seems  likely  that  the  first  possibility  represents  the  facts 
more  correctly. 

In  consideration  of  the  above  theory  the  accounts  receivable 
should  be  aged.  Possibly  some  of  these  trade  accounts  are  doubt- 
ful and  not  properly  classed  as  quick  assets,  as  in  the  case  of  the 
notes  receivable. 


44  ACCOUNTING— THEORY  AND  PRACTICE 

Merchandise,  $558,240.  Is  it  all  in  salable  condition?  How 
valued?  Based  upon  cost  of  goods  sold,  this  amount  reflects  over 
3  months'  stock  on  hand. 

Notes  Payable,  $2p2,ojo.  The  conditions  upon  which  these 
terms  were  made  would  necessarily  play  a  part  in  the  analysis. 
When  due?    Any  renewable?    If  so,  for  what  period? 

Accounts  Payable,  $4^0,480.60.  Of  this  amount,  $135,000  is 
payable  to  officers,  directors,  stockholders,  and  employees.  What 
does  the  item  represent?    Wages  unpaid?    Bonuses? 

The  balance  of  the  account  is  reflected  in  the  inventory  item 
of  $558,740. 

Accrued  Items,  $75,000.  A  schedule  of  this  item  would  be 
interesting.  If  dividends,  how  long  are  these  due  and  outstand- 
ing?   Is  the  preferred  stock  a  cumulative  issue? 

Land  and  Building — Plants,  $jy5,ooo. 

Machinery,  Equipment,  and  Fixtures,  $265,000.  When  was  the 
last  appraisal  made,  and  by  whom?  What  improvements  were 
made  in  the  last  year  and  the  cost  thereof?  What  is  the  signifi- 
cance of  mortgage  on  machinery  and  equipment?  To  whom  given 
and  when?    For  what  period? 

Trade-Marks,  Formulas,  and  Good-Will,  $200,000.  What  is 
the  policy  in  regard  to  depreciation  or  writing  down  of  this  figure? 
Has  any  amount  been  written  off  to  date?  What  is  the  basis  of 
valuation? 

Due  from  Allied,  Controlled,  and  Subsidiary  Companies, 
$i28,gy4.o8.  What  is  the  likelihood  of  this  amount  being  col- 
lected, or  will  these  companies  require  additional  financing  in  the 
near  future?  Upon  what  terms  have  these  amounts  been  ad- 
vanced, or  are  they  for  merchandise  sold  to  the  parent  company? 
(This  query  does  not  refer  to  the  $43,974.08  due  from  Own 
Selling  Houses  or  Branches.) 

Advances,  Loans,  etc.,  $ioj,458.g6.  Were  these  advance? 
made  to  secure  raw  material?  What  is  the  status  of  these  items 
at  the  present  time?  Is  the  corporation  liable  to  a  further  pay- 
ment upon  delivery  of  these  goods  or  materials?    If  so,  to  what 


ANALYSIS  OF  BORROWERS'  STATEMENTS  45 

extent,  and  how  soon?  Does  the  amount  shown  as  forward 
purchases  represent  the  entire  habiUty  under  this  head  or  are 
these  independent  of  the  above? 

Deposits  of  Money:  Current  Liabilities,  $ijo,ooo,  Long-Term 
Liabilities,  $100,000.  Inquiry  should  be  made  as  to  the  agree- 
ment under  which  this  money  is  deposited  and  how  urgent  is  the 
payment  of  the  amount  classed  as  current.  Was  the  long-term 
amount  left  for  a  term  of  years  by  a  member  of  a  partnership 
which  the  corporation  was  formed  to  acquire? 

Special  Reserve,  $60,000.  In  the  absence  of  any  definite  quali- 
fication, the  special  reserve  is  assumed  to  apply  as  a  general  or 
contingent  reserve.  Are  the  reserves  for  the  notes  and  accounts 
adequate?  It  is  possible  that  the  item  of  $14,560.15  covers  all 
the  items  considered  bad  or  doubtful,  which  are  in  that  manner 
eliminated. 

General  Considerations 

The  ratio  of  $.89  shows  the  corporation  to  be  in  a  very  poor 
financial  condition,  though  of  course  not  insolvent,  as  the  Capital 
account  still  reflects  a  balance  even  when  the  contingent  liabili- 
ties and  forward  purchases  are  taken  into  consideration.  The 
working  capital,  however,  has  been  exhausted  and  $107,000  more. 

The  main  question  is  one  of  inventory.  Can  the  stock  be 
moved?  If  it  could  be  moved  provided  a  loss  were  taken,  how 
much  sacrifice  need  be  made?  The  entire  statement  shows  that 
the  management  has  taken  quite  an  optimistic  viewpoint,  as  will 
be  seen  from  the  following  figures: 

Inventory $558,000.00 

Cash  Advances 103,000.00 

Forward  Purchase 125,000.00 

Total $786,000.00 

This  total  will  probably  be  the  inventory  figure  when  all 
merchandise  is  received,  provided  there  are  no  further  liabilities 
in  connection  with  the  advances.    This  amount  equals  the  value 


46  ACCOUNTING— THEORY  AND  PRACTICE 

of  the  cost  of  goods  sold  in  more  than  4^  months — too  long  a 
period,  in  that  it  does  not  allow  sufficient  turnover  for  adequate 
profit. 

The  cost  of  goods  sold  for  the  period  under  review  was 
$2,034,530,  allowing  a  gross  profit  of  $316,140,  which  the  operat- 
ing expenses  alone  exceeded.  The  plant  is  probably  built  for 
volume  production,  which  did  not  materialize.  Consequently  a 
radical  curtailment  of  operations  is  necessary,  provided  there  will 
be  a  saving  in  the  operating  expense  thereby.  This  seems  likely, 
as  the  pay-roll  is  included  in  this  item,  and  would  be  the  first  to 
be  affected. 

The  alternative  is  an  aggressive  selling  campaign  for  the  pur- 
pose of  disposing  not  only  of  the  inventory  but  also  of  the  goods 
on  order  and  on  contract.  Decision  would  be  based  on  the  market 
and  selling  conditions. 

Assuming  that  the  notes  and  accounts  are  collectible,  the 
following  situation  presents  itself : 

Indebtedness  to  be  met  within  3  months: 

Accounts  Payable $490,480.00 

Acceptances  Payable 40,000.00 

Notes  Payable  Merchandise 42,050.00 

Total $572,530.00 

Quick  assets  to  meet  indebtedness: 

Cash $  58,055.00 

Notes 35,000.00 

Accounts 281,000.00 

Liberty  Bonds .  .    6,000.00 

Total 380,055.00 

E.xcess  indebtedness  to  be  met  by  cash  sales  of  merchandise . .      $192,475.00 


Sales  for  the  period  average  about  $196,000,  but  the  fact  that 
the  heavy  inventory  item  appears  on  the  statement  would  indi- 
cate that  these  have  fallen  off  considerably,  especially  in  view  of 
the  comparatively  small  amount  of  accounts  receivable  outstand- 

inc;  from  trade  debtors. 


ANALYSIS  OP  BORROWERS'  STATEMENTS  47 

The  above  tabulation  does  not  consider  the  bank  loans  which 
if  added  to  the  excess  indebtedness  above  would  reach  a  total  of 
$442,475,  or  a  somewhat  hopeless  prospect  for  the  immediate 
future.  It  has  been  assumed  the  banks  would  carry  the  borrowing 
corporation  for  a  reasonable  period  until  it  could  extricate  itself 
from  its  entanglements.  This  also  refers  to  the  Deposits  of 
Money  under  the  head  of  Current  Liabilities. 

Capital  is  generally  needed  in  such  a  situation  and  is  most 
difficult  to  procure.  If  sufl&cient  capital  could  be  secured  to  re- 
place the  amount  of  decrease  as  indicated  by  the  deficit,  the  debts 
could  be  liquidated  to  a  sufficient  extent  and  the  corporation 
again  placed  in  possession  of  working  capital.  This  seems  un- 
likely as  the  deposits  of  money  appear  to  reflect  a  tendency  on 
the  part  of  interested  or  related  parties  not  to  take  any  risks  in 
addition  to  those  that  may  have  already  been  assumed. 

The  mortgage  upon  plant  does  not  appear  large.  This  could 
probably  be  increased  and  sufficient  capital  secured  to  finance  the 
immediate  future  if  the  other  methods  fail.  At  least  efforts 
should  be  made  to  dispose  of  the  balance  of  the  authorized  and 
unissued  first  mortgage  bonds,  as  this  would  set  up  a  slow  or  long- 
term  liability,  the  proceeds  of  which  would  liquidate  a  current 
liability. 

In  the  recent  period  of  deflation  resort  was  often  made  to  the 
cancellation  of  contracts  for  merchandise  not  already  received. 
This  is  mentioned  here  only  as  a  practice  that  is  sometimes  re- 
sorted to,  but  it  is  not  for  obvious  reasons  recommended.  The 
statement  shows,  however,  a  condition  under  which  cancellations 
might  be  attempted  to  tide  over  a  period  of  financial  stringency. 
In  such  a  case  sellers  are  sometimes  willing  to  grant  the  request 
of  the  buyer,  thereby  minimizing  their  loss,  which,  as  can  be 
readily  understood,  would  be  very  much  greater  if  the  concern 
failed  having  on  hand  their  merchandise  for  which  payment  had 
not  been  made. 

The  disposal  of  holdings  in  the  subsidiary  companies  would 
not  be  feasible.    The  holdings  are  not  sufficient  in  amount  to 


48  ACCOUNTING— THEORY  AND  PRACTICE 

play  an  appreciable  part,  and  sales  might  be  adversely  affected 
if  that  course  were  taken.  Should,  however,  these  holdings  in- 
volve an  obligation  to  finance  the  subsidiary  companies  the  ad- 
visability of  their  disposal  might  be  considered. 

It  is  assumed  that  the  patents,  trade-marks,  and  formulas 
are  essential  to  the  undertaking  and  could  not  be  sold  to  secure 
capital  or  funds  without  relinquishing  the  business. 

To  summarize :  Some  or  all  of  the  following  courses  should  be 
decided  and  acted  upon : 

1 .  Sale  of  inventory  at  favorable  prices  and  upon  short-term 

agreements. 

2.  Curtailment  of  operations  in  the  manufacture  of  the 

product. 

3.  Efforts  made  to  collect  outstanding  notes  and  accounts 

owed  to  the  corporation. 

4.  Bank  loans  renewed. 

5.  New  capital  secured  by  sale  of  stock. 

6.  Additional  mortgage  placed  upon  plant,  and  remainder 

of  bonds  sold. 

7.  Purchase  contracts  and  agreements  canceled  or  deferred. 


CHAPTER  III 

FOREIGN  EXCHANGE  ACCOUNTING 
By  Frederick  W.  Scholz 

I.  Introduction  and  Books  of  Original  Entry 

General  Considerations 

The  term  "foreign  exchange"  in  its  broadest  sense  may  be 
said  to  represent  the  most  efficient  method  of  settling  mutual 
obligations  arising  out  of  transactions  between  different  nations 
or  the  representatives  of  these  nations.  In  a  general  way  we 
may  classify  these  transactions  as  either  commercial  or  banking, 
and  may  subdivide  these  as  shown  in  the  following  schedule : 

1.  Commercial  transactions: 

(a)  Export  trade 

(b)  Import  trade 

(c)  Purchase  and  sale  of: 
(i)  Securities 

(2)  Bills  of  exchange 

(d)  Foreign  travel 

2,  Banking  transactions: 

(a)  Investment  in  foreign  securities 

(b)  Use  of  deposits  kept  in  foreign  banks 

(c)  Speculation  in  exchange 

(d)  Arbitrage 

(e)  Borrowing  and  lending  funds 

(f)  Gold  shipments 

(g)  Government  business 

In  all  of  the  above  transactions,  debit  or  credit  balances  are 
created  which  must  be  settled  in  countries  separated  from  each 

^  49 


50        ACCOUNTING— THEORY  AND  PRACTICE 

Other  by  long  distances.  Instead  of  shipping  specie  or  gold  bull- 
ion to  settle  these  balances,  the  several  parties  to  the  transaction 
take  advantage  of  the  facihties  offered  by  foreign  exchange  and 
settle  their  accounts  without  using  anything  but  the  credits 
established  in  the  various  countries.  The  institutions  and 
individuals  that  make  possible  this  mobile  settlement  between 
nations  are  classified  as  "foreign  exchange  banks  and  bankers." 
Sometimes  their  main  and  only  business  is  buying,  selling,  and 
dealing  in  foreign  exchange;  sometimes,  as  in  the  case  of  certain 
banking  institutions,  foreign  exchange  is  only  one  phase  of  the 
general  banking  business. 

It  is  not  the  purpose  of  this  chapter  to  discuss  the  theory  and 
practice  of  foreign  exchange,  with  which  the  reader  may  become 
famihar  through  any  good  textbook  on  foreign  exchange.  On 
the  other  hand,  the  accounting  for  foreign  exchange  transactions 
will  be  followed  out  in  detail,  laying  particular  stress  upon  those 
features  peculiar  to  this  important  branch  of  international 
banking. 

Organization 

The  foreign  exchange  business  is  carried  on  by  two  classes  of 
institutions,  namely,  (i)  bankers  whose  principal  business  is 
trading  in  foreign  exchange,  and  (2)  banks  where  this  work  is 
carried  on  by  a  distinct  branch  or  division  of  the  institution. 
While  the  two  types  may  differ  as  to  the  treatment  of  the  Capital 
account  on  the  foreign  exchange  books,  there  is  no  fundamental 
difference  in  the  accounting  methods  used,  and  transactions  are 
treated  in  the  same  way  by  both  types.  As  for  the  Capital 
account,  however,  in  the  case  of  the  banker  engaged  exclusively  in 
foreign  exchange,  the  account  represents  the  usual  capital  invest- 
ment found  in  any  enterprise,  whereas  in  the  case  of  the  foreign 
exchange  division  of  a  bank,  the  account  represents  merely  an 
investment  of  the  bank  in  this  department,  or,  in  other  words,  a 
loan  by  the  bank  to  this  division,  and  is  shown  as  an  asset  on  the 
general  books  of  the  bank. 


FOREIGN  EXCHANGE  ACCOUNTING  51 

Foreign  Exchange  Banker's  Capital 

Capital  Investment .  .     $500,000.00 
First  Bank,  Foreign  Exchange  Division  Capital 


Due  from  Foreign  Exchange 

Division $500,o<5o.oo 


Foreign  Exchange  Division  Capital 


Due  to  Bank $500,000.00 

When  the  bank  with  a  foreign  exchange  division  prepares  a 
consolidated  statement  of  its  financial  condition,  these  two  items 
disappear,  being  interdivision  obligations  and,  therefore,  merged 
in  the  total  of  the  bank's  assets,  liabilities,  and  capital. 

The  Trader 

When  we  approach  the  actual  transaction  in  foreign  exchange, 
we  find  the  focal  point  to  be  the  foreign  exchange  trader.  The 
"trader,"  as  he  is  commonly  called,  is  the  most  important  factor 
in  the  work  of  the  foreign  exchange  department.  He  must  be  a 
man  of  wide  experience  in  foreign  exchange  transactions,  quick  to 
see  a  favorable  turn  of  the  market,  ready  to  take  advantage  of  the 
rapid  fluctuations  of  the  market,  and  able  to  follow  up  his  deci- 
sions with  acts  profitable  to  his  firm.  The  trader  has  at  hand 
a  large  number  of  telephones  which  connect  him  by  direct  wire 
with  the  foreign  exchange  brokers.  The  latter  act  as  intermedi- 
aries between  banks  or  bankers  wishing  to  buy  or  sell  foreign 
exchange,  and  also  between  the  merchant  exporter  or  importer 
and  the  bank.  The  broker  keeps  in  constant  touch  with  the 
market  for  the  different  kinds  of  exchange  and  is  thus  able  to 
quote  rates  of  exchange  to  the  bank  at  any  time.  However, 
banks,  especially  the  larger  ones,  are  coming  more  and  more  to 
deal  directly  with  each  other;  and  the  exporter  or  importer  also 


52  ACCOUNTING— THEORY  AND  PRACTICE 

goes  directly  to  his  bank  in  his  foreign  exchange  dealings  instead 
of  employing  the  broker  as  a  middleman. 

We  have  stated  that  the  trader  is  the  center  of  all  exchange 
transactions.  To  facilitate  the  comparison,  let  us  liken  the  buy- 
ing and  selling  of  exchange  to  the  buying  and  selling  of  any  other 
commodity.  Suppose  an  American  importer  owes  a  bill  of  goods 
in  francs  to  a  French  exporter.  He  goes  to  the  foreign  exchange 
banker  and  asks  for  the  exchange  rates  on  Paris  for  banker's 
checks.  In  other  words,  he  wants  to  know  how  many  dollars  it 
will  take  to  equal  the  amount  in  francs  which  he  owes  to  his 
French  exporter.  The  banker,  to  whom  the  merchant  applies  for 
this  information,  calls  up  his  trader,  who  obtains  the  quotation 
from  a  broker  or  else  gives  the  quotation  on  his  own  account 
based  on  the  general  market.  The  merchant  then  buys  a  bank- 
er's check  or  sight  draft  on  a  French  banker,  pays  as  many  dollars 
as  the  draft  is  worth  in  dollars  on  that  date,  and  sends  this  foreign 
bill  of  exchange  to  the  French  exporter  in  settlement  of  his  debt. 

In  this  case  he  bought  a  claim  to  foreign  money,  which  he 
turned  over  to  the  person  to  whom  it  was  due.  He  bought 
exchange,  just  as  he  might  have  bought  a  claim  to  merchandise 
and  received  the  merchandise  in  due  time.  However,  the  trader 
had  to  be  consulted  for  the  rate,  and  it  was  from  this  source  that 
the  threads  originated  which  eventually  end  in  the  books  of  final 
entry,  the  ledgers,  and  later  with  many  other  transactions  make 
up  the  financial  statement.  It  can  safely  be  said  that  no  pur- 
chase or  sale  of  exchange  can  take  place  without  quoting  an  ex- 
change rate,  and  since  the  trader  in  well-organized  exchange 
houses  is  the  one  who  keeps  in  constant  touch  with  the  market  for 
exchange,  he  must  of  necessity  be  drawn  into  every  such  trans- 
action. It  is  for  this  reason  that  he  may  be  called  the  center  and 
pivotal  point  of  the  entire  foreign  exchange  business. 

Trading  Profits 

One  very  important  feature  depending  upon  the  skill  of  the 
trader  is  his  ability  to  make  profits  (and  also  at  times  suffer 


FOREIGN  EXCHANGE  ACCOUNTING  53 

losses)  for  his  house.  Profits  in  foreign  exchange  are  made 
primarily  through  buying  exchange  at  a  rate  lower  than  that  at 
which  it  is  sold.  Sometimes  the  trader  will  see  an  opportunity 
to  buy  sterling  at  a  low  rate  in  anticipation  of  selling  it  at  a  higher 
rate  to  customers  who  wish  to  make  remittances  to  England  or 
who  have  to  buy  sterling  to  meet  sterling  drafts  maturing  in  the 
London  market.  Sometimes  the  trader  sells  exchange  without 
having  any  on  hand:  in  other  words,,  he  sells  "short,"  and  then 
has  to  buy  exchange  to  cover  his  "short"  sale.  If  he  can  buy 
this  exchange  more  cheaply  than  he  previously  sold  it,  he  realizes 
a  profit  from  the  transaction. 

Let  us  take  another  typical  case.  An  American  importer, 
anticipating  purchases  of  goods  in  England  6  months  ahead,  goes 
to  his  bank  and  asks  the  latter  to  enter  into  a  contract,  whereby 
the  bank  will  furnish  him  with  a  sum  in  sterling  of,  let  us  say, 
£i  50,000,  this  money  to  be  athis  disposal  during  the  first  5  months 
of  the  following  year  at  the  rate  of  £30,000  a  month.  The  trader 
in  this  case  is  selling  for  future  delivery,  or  dealing  in  "futures," 
or  "future  exchange."  He  makes  a  contract  with  the  importer 
to  deliver  to  him  these  pounds  sterling  at  the  specified  time 
at  rates  which  he  must  determine  now  and  which  are  fixed  in  the 
contract.  Whether  the  trader  will  gain  or  lose  on  this  transaction 
depends  entirely  on  his  experience  and  skill  in  reading  the  market 
and  in  being  able  to  foretell  with  a  fair  degree  of  accuracy  how  the 
market  in  sterling  exchange  will  move  during  the  period  when  this 
future  exchange  must  be  delivered.  In  a  particular  instance  an 
American  importer  who  knew  very  little  about  exchange  bought 
£150,000  sterling  for  future  delivery  during  the  following  6 
months,  believing  that  the  market  would  go  up  and  sterling  rates 
would  rise.  Unfortunately  sterling  dropped,  as  did  all  exchanges 
during  the  early  part  of  1920,  and  he  suffered  a  loss  of  about 
$45,000,  which,  of  course,  represented  a  profit  made  by  the  bank 
which  had  contracted  to  sell  this  exchange  to  the  importer,  since 
it  was  able  to  cover  its  contract  delivery  by  buying  exchange  at 
current  market  rates.     The  merchant,  on  the  other  hand,  had  to 


54        ACCOUNTING— THEORY  AND  PRACTICE 

pay  the  contract  rates,  which  in  this  case  were  much  higher  than 
the  market. 

Another  method  by  which  the  trader  can  make  profits  is  by 
means  of  arbitrage  transactions.  These  will  be  explained  in 
detail  later.  Let  it  sufiice  to  say  at  this  point  that  it  takes  a 
shrewd  and  experienced  trader  to  make  profits  from  arbitrage 
transactions,  especially  if  he  plays  a  three-cornered  game,  i.e.,  if 
he  deals  with  three  different  markets  at  once.  Suppose  he  notes 
that  the  rates  between  Paris  and  London  are  more  favorable  than 
between  New  York  and  Paris  or  New  York  and  London.  He 
sells  dollars  to  buy  francs  in  Paris;  then  he  sells  francs  to  buy 
sterling  in  London;  lastly  he  sells  these  pounds  sterling  to  buy 
dollars  in  New  York.  He  may  also  keep  this  sterling,  which  was 
bought  more  cheaply  in  Paris  than  it  could  have  been  bought  in 
New  York  and  draw  cables  and  drafts  against  this  balance  which 
he  has  created  in  the  London  market. 

Finally,  there  are  three  other  sources  of  income,  which  are  less 
dependent  on  the  skill  of  the  trader,  namely,  (i)  income  from 
interest  earned  by  balances  kept  abroad  in  correspondents' 
banks,  (2)  income  from  commissions  charged  customers  for  ser- 
vices rendered  in  cormection  with  foreign  exchange  transactions, 
and  (3)  income  from  discounting  of  long-  or  short-term  bills  of 
exchange  (time  bills),  bought  by  the  bank  in  the  home  market  at 
one  discount  rate  and  sent  to  London  or  any  other  foreign  mar- 
ket to  be  rediscounted  at  a  more  favorable  rate  of  exchange,  the 
proceeds  being  used  to  create  a  balance  against  future  drawings. 
These  points  will  be  covered  later. 

Position  Sheet 

Let  us  now  study  the  method  whereby  the  trader  keeps  track 
of  his  purchases  and  sales  of  exchange,  and  of  his  commitments 
at  future  dates.  It  is  imperative  for  him  to  know  at  any  time 
during  the  day  whether  he  has  sufiicient  balances  to  his  credit  in 
foreign  banks  to  meet  his  drawings,  and  whether  his  balances- 
abroad  are  so  heavy  that  he  can  afford  to  sell  exchange  in  order 


FOREIGN  EXCHANGE  ACCOUNTING 


55 


to  reduce  them.     The  record  which  keeps  him  informed  of  these 
facts  is  known  as  the  "position  sheet,"  and  is  shown  in  Form  i. 


POSITION  SHEET 

Long 

Short 

Sterling 

Paribas 

Bque.  Franc  Et  Ital. 

Soc.  Generale 

Banco    His.    Amer.   Ma- 

drid 

Banco   His.  Amer.    Bar- 

celona 

Banco  de  Barcelona,  Bare 

Swiss  Check  Account 

Swiss  Joint  Account 

Rott  Bhv.  Adam 

Ned.  Ind.  Hdbk. 

Bque.     Generale    Beige. 

Ant. 

Brussels 

Lire 

Stockholm 

Kjob.  Hdbk.  Copenhagen 

Danske  Copenhagen 

Christiana 

Direction 

Nordd. 

Lloyds  Bk.' 

Mend. 

Berliner 

Warburg 

Futures 

Marks 

Vienna 

Prague 

Budapest 

Form  I.     Position  Sheet 


This  shows  him  his  position  at  any  time  and  enables  him  to 
strike  a  balance  whenever  he  wishes.     The  position  sheet  may  be 


56        ACCOUNTING— THEORY  AND  PRACTICE 

called  a  "daily  perpetual  inventory  of  exchange  bought  and  sold." 
Position  sheets  differ  in  detail  of  design  in  various  banks,  but 
in  general  they  are  subdivided  into  columns,  segregated  by  cur- 
rencies, with  columns  for  debit  and  credit  balances,  or,  as  they  are 
better  known,  "long"  or  "short"  positions.  If  his  position  is 
"long,"  the  trader  has  a  debit  balance;  in  other  words,  he  has 
a  balance  in  his  favor  at  this  correspondent  bank  against  which 
he  can  draw.  If  his  position  is  "short,"  the  books  show  a  credit 
balance,  which  means  that  he  has  drawn  more  than  he  has 
remitted  to  his  correspondent,  amounting  practically  to  an  over- 
draft on  his  balance  abroad. 

In  the  morning  the  position  sheet  is  placed  before  the  trader  with 
his  position  marked  as  to  every  currency  in  which  he  deals.  This 
position  for  each  currency  is  composed  of  threemain  groups,  namely : 

1.  The  "nostro  "  balances.  These  are  the  balances  shown  in 
the  "nostro"  accounts  kept  with  each  individual  foreign  corres- 
pondent and  represent  the  net  debit  or  credit  balance  after  all 
debits  to  the  accounts  (remittances)  and  all  credits  to  the  ac- 
counts (drawings)  have  been  entered.  Both  debits  and  credits 
represent  not  only  the  actual  balances  on  the  books  of  the  foreign 
correspondent,  but  also  transactions  in  transit,  which,  however, 
have  been  posted  on  our  books. 

2.  The  spot  contracts  unexecuted.  These  are  contracts  to 
sell  or  buy  exchange  for  immediate  execution,  held  over  for  one  or 
more  days. 

3.  The  future  contracts.  These  are  commitments  entered 
upon  by  the  traders  to  buy  or  sell  exchange  for  future  delivery. 
In  the  two  latter  cases  details  as  to  time  of  delivery,  tenor,  kind 
of  exchange  (marks,  francs,  etc.),  and  option  are  given.  We 
might  set  up  the  equation  as  follows : 

Nostro  Balances+Spot  Contracts -f  Future  Contracts  =- Trader's  Position 

Daily  Transactions 

The  above  information,  either  in  detail  or  in  total  for  each 
currency,  is  given  to  the  trader  in  the  morning  and  he  governs 


FOREIGN  EXCHANGE  ACCOUNTING  57 

himself  accordingly.  As  he  buys  and  sells  exchange  during  the 
day,  record  is  kept  of  the  transactions  on  sheets  called  "record  of 
exchange  bought"  and  "record  of  exchange  sold."  The  totals 
segregated  as  to  currency  are  watched  and  positions  prepared  of 
any  currency  at  any  time  by  taking  into  consideration  all  pur- 
chases and  all  sales,  together  with  the  opening  balance,  and  strik- 
ing a  new  balance  to  reach  the  new  position. 

Whenever  the  trader  makes  a  purchase  or  a  sale  of  exchange, 
he  prepares  a  memorandum  of  the  details  of  the  transaction,  giv- 
ing the  tenor,  amount,  rate,  time  of  delivery,  and  the  name  of  the 
customer  or  broker  for  whom  or  with  whom  the  deal  was  made. 
This  so-called  "pro  forma  contract"  serves  as  a  basis  for  the 
accounting  entries  required  to  record  the  transaction.  The 
trader  may  be  likened  to  the  purchasing  agent  and  also  to  the 
selling  agent  of  a  commercial  house,  for  he  performs  the  tasks  of 
both,  and  is  instrumental  in  creating  either  profits  or  losses. 
Thus  in  the  office  of  the  trader  are  united  both  the  duties  of  buy- 
ing and  those  of  selling,  the  commodity  bought  and  sold  being 
exchange.  The  exchange  having  been  purchased  or  sold  by  the 
trader,  the  order  is  now  turned  over  to  the  clerical  force  in  the. 
foreign  exchange  office  for  further  treatment. 

Accounting  Records 

The  records  maintained  in  various  foreign  exchange  offices 
vary  greatly  as  to  form  and  method.  Some  banking  houses  still 
adhere  to  the  old  bound  book  of  record,  some  use  the  loose-leaf 
system,  and  others  employ  card  ledgers.  However,  they  must 
all  have  the  following  fundamental  records,  even  though  names 
and  systems  may  vary  in  detail. 

I.  Records  of  Original  Entry: 

Cable  Transfer  and  Letter  Transfer  (delegations)  Jour- 
nals 
Foreign  Bankers'  Check  Registers 
Foreign  Time  Draft  Registers 
Exchange  Purchase  Journals 


58        ACCOUNTING— THEORY  AND  PRACTICE 

Exchange  Sales  Journals 
Letter  of  Credit  Records 
Acceptance  Records 
Letters  of  Advice 

Authorization  Sheets  for  Purchases  and  Sales  of  Ex- 
change 
General  Journals 
Cash  Records 
Profit  and  Loss  Journal 

2.  Records  of  Final  Entry : 

Nostro  Ledgers 

Loro  (Vostro,  Dollars)  Ledgers 
Domestic  or  General  Ledgers 
Private  Ledgers 

3.  Ultimate  Goal: 

Profit  and  Loss  Statement 
Financial  Statement 

A  typical  schedule  of  balance  sheet  accounts  from  which  the 
financial  statement  is  prepared  and  of  the  accounts  which  make 
up  the  profit  and  loss  statement  is  given  below.  It  contains  the 
items  most  common  to  foreign  exchange  banking  and  trading. 

Balance  Sheet  Accounts 

Assets 
Foreign  Specie 
Gold  Shipments  (Bullion) 
Foreign  Investments 
Advances  on  Time  BiUs 
Accounts  Receivable: 

Due  for  Foreign  Exchange  Sold 

Nostro  Interest  Claims  Receivable 
Dollar  accounts — debit  balances  of  banks  and  bankers: 

Debit  balances  other  than  banks  and  bankers 

Nostro  accounts — balances  due  from  foreign  banks  and 
bankers  (balances  in  foreign  banks) 


FOREIGN  EXCHANGE  ACCOUNTING  59 

Acceptances  Purchased: 

Own 

Commercial 

Bankers' 
Accrued  Interest  Receivable  on  Loans  and  Overdrafts 
Customers'  Liability: 

On  Acceptances 

Under  Travelers'  Letters  of  Credit 

Under  Commercial  Letters  of  Credit 
Bills  of  Exchange  Discounted 

Liabilities 
Deposit  Accounts : 

Foreign  Accounts 

Deposits  Reserved  Against  Bills  of  Exchange 

Deposits  Against  Travelers'  Letters  of  Credit  Issued 
Travelers'  Checks  Outstanding 
Commercial  Letter  of  Credit  Deposits 
Long  Drafts  on  Foreign  Correspondents 
Nostro  Accounts — Overdrafts 
Unpresented  Foreign  Drafts 
Dollar  Drafts  Drawn 
Accrued  Interest  Payable 
Due  for  Foreign  Exchange  Bought 
Acceptances  Due  but  not  Presented 
Our  Acceptances: 

Domestic  and  Foreign  Shipments 

Under  Commercial  Letters  of  Credit  (export  and  import 
credit) 

By  Foreign  Correspondents  for  Our  Account 
Bills  of  Exchange  Rediscounted 
Capital  Account 

Profit  and  Loss  Accounts 
Debit  Interest  and  Discount 
Credit  Interest  and  Discount 


6o  ACCOUNTING— THEORY  AND  PRACTICE 

Cable  Expenses 

Brokerage 

Guilder,  Franc,  Mark,  Sterling  Accounts 

Commissions : 

Travelers'  Letters  of  Credit 

Commercial  Letters  of  Credit 

Dollar  Accounts 

Long  Drafts 

Acceptances 
Earnings  on  Foreign  Investments 
Bullion  Trading 
Foreign  Money  Currency 
Insurance  Earnings 
Interest  on: 

Capital 

Dollar  Deposits 

Nostro  Accounts 

As  the  subject  of  foreign  exchange  transactions  is  developed, 
these  accounting  records  and  forms  and  the  various  ledger  ac- 
counts employed  will  be  explained  in  detail. 

Foreign  Specie 

Large  banks  having  foreign  exchange  departments  and  some 
foreign  exchange  houses  dealing  principally  with  travelers  to  for- 
eign countries  usually  keep  on  hand  currency  of  different  foreign 
countries,  which  they  sell  to  travelers  who  expect  to  go  abroad 
and  who  wish  to  be  supplied  with  the  currency  of  that  country. 
Any  difference  between  the  price  paid  by  the  bank  for  this  currency 
and  the  selling  price  to  the  customer  is  entered  in  the  Foreign 
Money  Currency  account,  which  records  the  profits  or  losses  on 
these  transactions.  This  currency,  i.e.,  foreign  species,  should  be 
treated  exactly  like  cash.  Its  valuation  at  the  time  the  financial 
statement  is  prepared  will  depend  upon  the  market  rate  for  foreign 
money  at  the  date  of  the  statement.  As  with  other  investments, 
the  house  has  the  option  of  depreciating  the  currency  down  to 


FOREIGN  EXCHANGE  ACCOUNTING  6l 

the  market,  when  the  latter  is  lower  than  cost,  or  of  appending 
a  footnote  showing  what  the  market  value  is  at  the  date  of  the 
statement. 

Gold  Shipments  (Bullion) 

At  certain  times  it  becomes  necessary  for  a  country  to  reduce 
its  liability  to  another  country  arising  from  imports  by  shipping 
gold  bullion  to  the  creditor  nation.  For  example,  France  has 
bought  large  quantities  of  raw  products  from  American  exporters, 
and  ships  bullion  to  an  American  bank  to  be  used  in  liquidating 
the  debts  due  American  merchants.  Again,  an  English  house 
expects  to  make  large  purchases  of  securities  in  this  country 
and  will  require  a  large  credit  balance  in  its  favor.  The  English 
bank  may  ship  gold  bullion  to  an  American  bank  to  be  used  in 
creating  a  dollar  balance  on  the  books  of  the  American  bank.  To 
handle  this  transaction  the  Gold  Shipments  account  is  used.  As 
the  foreign  bank  wishes  to  have  the  proceeds  of  the  sale  of  bullion 
for  its  account  placed  upon  the  American  banker's  books  as  a 
deposit  account,  the  Gold  Shipments  account  is  debited  with  the 
estimated  value  of  the  bullion  and  the  correspondent's  account 
is  credited  on  the  American  banker's  books  as  follows: 

Gold  Shipments $ 

London  and  Midland  Bank  Deposit $ 

To  charge  Gold  Shipments  account  and  credit 
deposit  account  with  estimated  value  of  gold 
shipment. 

The  gold  is  then  sent  to  the  United  States  Assay  Office  for 
assaying  and  when  the  real  value  is  known,  adjustment  entries 
are  made  to  these  accounts  in  order  to  credit  the  correspondent 
with  the  full  amount  of  the  proceeds  of  the  disposal  of  the  bullion. 
There  remains  the  task  of  clearing  the  Gold  Shipments  account  of 
the  bullion  and  finishing  the  transaction.  This  is  done,  if  the 
bullion  is  sold  by  the  American  banker  for  his  correspondent,  by 
crediting  the  Gold  Shipments  account  and  debiting  Cash  as 
follows: 


62                   ACCOUNTING— THEORY  AND  PRACTICE 
Cash $ . . . 


Gold  Shipments $ 

To  clear  Gold  Shipments  account  through  sale 
of  gold  received  for  account  of  foreign  corres- 
pondent. 

There  remain  on  the  books  of  the  American  banker  the  asset, 
cash,  received  for  the  gold,  and  the  liability  to  the  foreign  cor- 
respondent, against  which  the  latter  can  draw  bills  of  exchange  or 
issue  cable  payments. 

Foreign  Investments 

Just  as  American  business  men  invest  their  money  in  stocks 
and  bonds  issued  by  American  corporations,  so  they  may  also  in- 
vest money  in  foreign  corporations.  These  investments  are 
treated  the  same  as  any  other  securities  and  require  no  comment. 
When  the  actual  certificates  are  kept  abroad  by  correspondent 
bankers  or  depositories,  there  are  two  methods  open  to  the 
American  banker  to  collect  the  dividends  or  interest  earned.  In 
the  case  of  interest,  where  he  knows  the  exact  amoimt,  he  can 
either  draw  on  his  correspondent  for  the  amount,  crediting  the 
deposit  account  which  he  maintains  abroad  with  his  correspond- 
ent, or  he  can  notify  his  correspondent  that  a  certain  sum  of 
interest  falls  due  on  a  certain  date,  and  that  he  is  debiting  the 
correspondent's  account  with  the  amount,  assuming  the  col- 
lection of  the  interest  at  the  proper  date.  In  the  first  instance  we 
must  assume  that  the  correspondent  has  credited  the  American 
banker's  account  with  the  interest  earned,  thereby  increasing 
the  latter's  balance  against  which  he  may  draw  his  draft.  This 
action  on  the  part  of  the  foreign  correspondent  is  equivalent  to 
sending  a  remittance  for  the  amount  to  his  American  correspond- 
ent, except  that  no  remittance  is  actually  sent,  but  merely  a  credit 
entered  on  the  books  of  account. 

The  entries  passed  might  be  as  follows:  The  English  cor- 
respondent when  receiving  the  interest  earned  by  securities 
belonging  to  an  American  investor  enters : 


FOREIGN  EXCHANGE  ACCOUNTING  63 

Cash £ 


American  Banker's  Deposit £ 

To  charge  Cash  for  interest  received  on 
securities  for  account  of  American  banker 
and  credit  his  account  with  same. 

The  American  banker  when  receiving  the  letter  of  advice  that 
the  interest  earned  has  been  credited  to  his  deposit  account 
enters : 

English  Banker's  Deposit $ 

Earnings  on  Foreign  Investments $ 

To  charge  English  banker  with  the  interest  due 
on  securities  held  abroad  and  credit  income 
account  with  same. 

Both  entries  show  both  pounds  sterling  in  the  foreign  money 
column  and  American  dollar  equivalents  in  the  dollar  column. 
Then,  if  the  American  banker  wishes  to  draw  against  this  account 
he  can  draw  a  sterling  draft  and  sell  it  to  a  customer,  debiting  Cash 
for  the  money  received  from  the  sale  of  the  draft  and  crediting 
his  correspondent  with  the  payment  of  the  draft  when  presented. 

Advances  on  Time  Bills 

Another  type  of  investment  frequently  made  by  foreign 
exchange  bankers  is  the  purchase  of  long-term  bills  of  exchange  in 
the  American  market  and  their  transmittal  to  foreign  money 
centers  either  for  rediscount  or  for  holding  until  maturity.  A 
banker  may  purchase  30,  60,  or  90-day  time  drafts  or  acceptances 
in  the  home  market  at  an  attractive  discount.  In  this  case  the 
investment  account  is  debited  with  the  bills  of  exchange  and 
Cash  and  Purchase  Discount  on  Bills  Receivable  are  credited. 

Advances  on  Time  Bills  (Sterling  and  Dollars) $ 

Cash $ 

Purchase  Discount  on  Bills  Receivable 

To  set  up  investment  in  long-term  bills  of  ex- 
change and  record  the  cash  paid  and  dis- 
count earned  on  the  purchase. 


64        ACCOUNTING— THEORY  AND  PRACTICE 

The  bills  of  exchange  may  then  be  sent  to  the  London  cor- 
respondent with  instructions  either  to  hold  until  maturity  or  to 
rediscount  at  once  in  the  London  market.  In  both  cases  the 
deposit  account  of  the  American  banker  is  credited  by  the  London 
banker  with  the  proceeds  from  the  collection  or  sale  of  the  bills  of 
exchange,  thus  building  up  the  credit  balance  of  the  American 
banker,  against  which  he  may  draw  drafts  or  issue  cable  pay- 
ments. The  American  banker  will  receive  a  letter  of  advice  in 
due  time  informing  him  that  the  bills  have  been  collected  and  will 
debit  the  account  of  his  correspondent  with  the  pounds  sterling 
and  the  dollar  amount,  depending  on  the  market  rate  at  the  time 
of  collection  or  of  discount. 

Exchange  Sales  (Accounts  Receivable) 

If  we  keep  in  mind  that  the  selling  of  exchange  is  merely  the 
sale  of  a  special  commodity,  much  of  the  apparent  mystery  of 
foreign  exchange  transactions  will  disappear.  Aside  from  the 
sale  of  drafts  connected  with  letters  of  credit  and  importing  or 
exporting,  the  banker  will  generally  sell  either  a  cable,  a  dele- 
gation, or  a  check  to  a  customer.  The  client  may  have  pay- 
ments to  make  in  a  foreign  country;  he  may  wish  to  create  a 
balance  in  a  foreign  bank  to  be  used  in  future  btsiness  trans- 
actions; or  he  may  wish  to  send  money  to  a  relative  living  abroad. 
Whatever  his  reasons  may  be,  he  will  telephone,  write,  or  com- 
municate in  some  other  way  with  the  foreign  exchange  banker 
directly  or  through  his  broker  for  the  purpose  of  buying  ex- 
change. Let  us  follow  the  three  types  of  operation — cable,  dele- 
gation, and  check — through  the  various  stages  until  they  reach 
the  ledger. 

Dealing  with  the  Customer  (Cables) 

Let  us  assume  that  the  Jones  Chemical  Company  wishes  to 
create  a  credit  in  a  London  bank  amounting  to  £50,000  and  buys 
a  cable  amounting  to  that  amount  from  a  foreign  exchange 
banker.     The  Jones  Company,  being  a  customer  of  the  banker, 


FOREIGN  EXCHANGE  ACCOUNTING 


65 


will  not  have  to  pay  cash  at  once  for  the  cable,  but  will  be  allowed 
a  certain  time  to  make  payment.  As  soon  as  the  order  for  the 
cable  has  been  received  a  confirmation  is  sent  to  the  purchaser, 
confirming  the  amount,  rate,  brokerage,  commission,  dollar 
equivalent  due  from  the  purchaser,  payee  abroad,  and  foreign 
bank  or  correspondent  through  whom  payment  is  effected.    The 


THE  FOREIGN  EXCHANGE  BANK 
NEW  YORK, 

ro 

WE  HAVE  SOLD  YOU  THE  FOLLOWING  EXCHANGE  PAYABLE  THROUGH 


RATE   DOLLARS 


TO  BE  PAID  BY  CABLE  TO 


CABLE  CHARGES 


X.B.  Pleue  examine  thia  bill  caTefuIlT. 

y\e  declJDe  til  iveponsibilitj  for  correct  pejmint  of  cable  tran8fer«  that  are  not  dulj  confirmed  Id  « 

in  making  a  cable  transfer  it  Is  folly  understood  and  agreed  that  no  liabilitj  sball  attach  to 

or  damage  in  consequenoe  of  an;  delaj  or  mistake  in  transmitting  the  mes&eire,  or  for  anj  cause  bejrc^nd 

In  cateoftnenon-deliTerj  of  the  dispatch,  payment  will  be  made  on  receipt  of  our  letter  to 


correspondent  for  asfy  Ion 
IT  control 
■spondent  confi  mipp  the  oVi 


Form  2.    Bill  for  Sale  of  Cable  Exchange 


sales  order,  usually  in  duplicate,  then  goes  to  another  department 
where  a  bill  (Form  2)  is  made  out  in  duplicate  or  triplicate,  the 
original  being  sent  to  the  customer  and  the  copies  retained  in  the 
office.  One  of  these  copies  goes  to  the  foreign  exchange  cashier 
who  keeps  it  in  the  unpaid  bill  file  until  payment  is  received, 
when  it  is  transferred  to  the  paid  bill  file. 

Before  the  foreign  exchange  banker  assumes  the  risk,  however, 
of  cabling  to  his  correspondent,  or,  in  the  case  of  checks,  of  issuing 
checks  against  his  balance  abroad,  someone  in  authority  must 
pass  on  the  propriety  of  the  sales  transaction  about  to  be  con- 
summated. This  may  be  one  of  the  executives  of  the  bank  or  one 
of  the  partners  of  a  firm  of  bankers.  The  best  name  given  to 
these  statistical  records  is  "  authorization  sheets."    The  specimen 


66 


ACCOUNTING— THEORY  AND  PRACTICE 


shown  in  Form  3  is  for  both  exchange  sold  and  exchange  bought. 
The  dollar  amount  column  as  well  as  the  foreign  currency  columns 
have  only  approximate  values,  as  the  purpose  of  these  sheets  is 
simply  to  keep  the  executive  posted  as  to  the  -various  sales  and 


SOLD 

Dollar 
Amount 

£ 

Fes. 

Mks. 

Misc. 

PURCHASER 

Partner 
Approved  by 

BOUGHT 

Amount 

Terms 

Drawer 

Drawee 

Dollars 
Afloat 

Partner 
Approved  by 

. 

' ' 

■ — ■ — — 

1 ' ~ ~~1 i ^ 

Form  3.    Autjiorization  Sheets  for  Exchange  Sold  and  Bought 

purchases  to  enable  him  to  control  the  amounts  involved,  and  to 
prevent  losses,  especially  on  the  sales  side,  through  entering  into 
contracts  for  the  delivery  of  exchange  for  the  account  of  clients 
who  may  not  be  good  risks. 

Dealing  with  the  Foreign  Correspondent  (Cables) 

The  cable  is  now  entered  in  a  cable  record,  in  either  bound 
or  loose-leaf  form,  which  will  be  used  later  to  check  the  letter 
of  advice  of  payment  executed  sent  to  the  American  banker  by 
his  correspondent  abroad.  This  cable  record,  which  is  also  for 
statistical  and  auditing  purposes,  contains  the  currency  and 
amount  of  the  cable,  value  date,  or  probable  date  of  arrival  of 
the  cable  abroad,  correspondent  on  whom  the  cable  is  drawn, 
payee  to  whom  payment  is  to  be  made,  and  the  party  for  whose 
account  the  cable  is  issued  in  this  country.     Meanwhile  the 


FOREIGN  EXCHANGE  ACCOUNTING 


67 


cable  has  been  translated  into  the  code  used  by  the  banker  and 
sent  off. 

As  the  day's  business  goes  forward  numbers  of  cables  are  sold 
to  be  drawn  on  the  various  correspondents  and  these  must  all  be 
confirmed  by  mail  to  the  correspondent.  It  often  happens  that  a 
cable  is  mutilated  in  transmittal  and  a  mail  confirmation,  while 
powerless  to  stop  the  original  payment,  may  help  to  straighten 
out  differences.  The  cables  having  been  summarized  according 
to  correspondents  are  confirmed  on  a  form  similar  to  that  shown  in 
Form  4. 


FOLIO 


THE  FOREIGN  EXCHANGE  BANK 
DearSirs:  ORIGINALf' 

We  herewith  confirm  our  cable,  requesting  you  to  effect  the  following  payments  to 
the  debit  of  our 


OFFICE  COPY 


Form  4.     Cable  Confirmation  Sent  to  Correspondent 


The  confirmation,  which  acts  as  a  letter  of  advice,  contains 
in  the  column  marked  "Particulars"  the  name  of  the  party  to 
whom  payment  is  to  be  made  and  the  party  for  whose  account 
the  payment  is  effected.  The  value  date  is  the  date  on  which 
the  trader  assumes  the  cable  will  reach  the  correspondent  and 
consequently  when  payment  will  be  effected,  since  the  cable  is 
payable  upon  receipt  and  deciphering  from  its  code  language. 
In  normal  times  traders  will  not  err  very  much  in  their  estimate 
of  time,  a  very  important  matter,  as  interest  adjustment  becomes 
necessary  if  there  is  any  difference  in  days  between  the  estimated 
and  the  actual  dates  of  payment.  Suppose  the  banker  estimates 
that  a  cable  will  be  paid  on  the  6th  of  the  month,  but  through 
some  delay,  payment  is  not  effected  until  the  8th  of  the  month. 
He  has  had  2  more  days'  interest  accruing  on  his  balance  abroad 


68  ACCOUNTING— THEORY  AND  PRACTICE 

which  is  a  profit  to  him,  as  the  rate  which  he  quoted  to  the  pur- 
chaser of  his  cable  in  New  York  assumed  the  loss  of  interest  on  the 
amount  of  the  cable  beginning  with  the  6th  of  the  month  and  not 
the  8th.  Had  he  known  that  the  cable  would  be  delayed  he 
could  have  quoted  a  lower  cable  rate,  as  he  would  have  taken  into 
consideration  the  2  days  during  which  he  had  the  use  of  the  bal- 
ance with  his  correspondent. 

Recording  the  Sales  Transactions  (Cables) 

The  sale  of  cable  exchange  is  now  ready  to  be  entered  in  the 
foreign  exchange  sales  journal,  a  specimen  page  of  which  is  shown 
in  Form  5.  A  specimen  page  of  a  typical  foreign  exchange  pur- 
chase journal  is  shown  in  Form  6.  The  coliunn  marked  "Num- 
ber" may  have  either  the  number  of  the  cable,  the  delegation, 
the  check  issued,  or  the  number  of  the  transaction,  depending 
on  the  office  system  employed.  Under  Particulars  in  the  sales 
journal  the  purchaser  and  in  the  purchase  journal  the  seller  of  the 
exchange  is  given.  In  the  case  of  exchange  sales  the  names  given 
in  this  column  constitute  the  so-called  "accounts  receivable" 
against  which  the  claim  for  the  sale  of  exchange  is  recorded  and 
to  which  the  bill  is  sent.  The  amount  column  in  both  cases  is  for 
foreign  currency  which  may  be  summarized  in  the  total  column. 
This  latter  is  desirable  where  a  total  is  made  up  of  numerous 
individual  items.  The  columns,  Rate — Dollars — As  Billed,  for  ex- 
change sales,  and  Rate — Dollars — As  Bought,  for  exchange  pur- 
chases refer  to  the  customer  from  whom  the  exchange  was  bought 
or  to  whom  it  was  sold.  The  column,  As  Advised,  refers  to  the 
correspondent's  account  to  whom  the  cable  was  sent  or  on 
whom  it  was  drawn.  Account  Credited  and  Account  Debited 
always  refer  to  the  correspondent's  account  to  which  the  trans- 
action will  be  posted.  The  brokerage  is  the  amount  earned  or 
expended  and  is  credited  or  charged  in  total  to  the  Brokerage 
account. 

Considering  for  the  moment  only  exchange  sold,  the  debits 
and  credits  of  a  transaction  may  be  expressed  as  follows: 


FOREIGN  EXCHANGE  ACCOUNTING 


69 


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70  ACCOUNTING— THEORY  AND  PRACTICE 

Due  for  Foreign  Exchange  Sold  (Exchange  Sales) $ . . . 

Foreign  Correspondent's  (Nostro)  Account 

Brokerage 

To  charge  accounts  receivable  with  amounts 
due  us  for  exchange  sold  and  to  credit  the 
foreign  correspondent's  account  (nostro) 
with  payments  to  be  made  by  him  and  to  set 
up  the  brokerage  liability  incurred. 


It  must  be  remembered  that  the  Exchange  Sales  account  Due 
for  Foreign  Exchange  Sold  and  the  Brokerage  account  have 
dollar  amoimts  only,  while  the  correspondent's  accoimt  has  both 
foreign  units  and  dollars. 

At  the  end  of  the  day  the  total  of  the  dollars  column,  As  Billed, 
will  be  debited  to  the  controlling  account,  Exchange  Sales,  and 
the  items  in  the  dollars  column,  As  Advised,  credited  individually 
to  the  proper  foreign  correspondents'  accoimts.  Taken  in  con- 
jimction  with  the  total  brokerage  posting,  this  total  can  be 
used  to  prove  the  correctness  of  the  aggregate  of  amounts  debited 
to  the  customers'  accounts.  Brokerage  is,  of  course,  also  posted 
in  summary  at  the  end  of  the  day.  These  accounts  receivable 
must  not  be  thought  of  as  running  the  length  of  time  customary 
with  commercial  accounts,  as  settlements  in  foreign  exchange  are 
made  within  a  very  short  period  and  most  of  the  business  is 
settled  through  immediate  payment  by  check  or  cash.  Conse- 
quently the  so-called  "accounts  receivable"  are  only  temporary 
items  to  be  cleared  oflf  within  a  few  days  by  cash  receipts. 

Both  the  Exchange  Sales  and  the  Exchange  Purchase  accoimts 
are  summary  accounts,  serving  both  as  controlling  and  as  clearing 
accounts.  Neither  one,  however,  enters  directly  into  the  Profit 
and  Loss  account,  but  under  normal  conditions  both  should  clear 
or  balance.  The  method  of  clearing  the  Exchange  Sales  accoimt 
is  as  follows:  Since  we  now  have  a  debit  balance  in  a  sales 
account,  contrary  to  the  usual  accounting  practice,  this  debit 
must  be  removed  or  ''cleared."  The  claims  against  customers 
for  the  sale  of  exchange  to  them,  as  shown  in  the  exchange  sales 


FOREIGN  EXCHANGE  ACCOUNTING  7 1 

journal  under  Dollars — Rate — As  Billed,  will  be  settled  by  the 
checks  remitted  by  them,  leading  to  the  following  entry  in  the 
books : 

Cash $ 

Exchange  Sales $ 


This  entry  serves  a  twofold  aim.  It  substitutes  the  asset, 
cash,  for  the  asset,  claim  against  customers  for  exchange  sold, 
and  by  the  credit  to  Exchange  Sales  it  clears  that  account,  leaving 
as  the  final  record  the  asset,  cash,  against  which  stands  the  credit 
to  the  foreign  correspondent  for  making  payment  out  of  the  funds 
in  his  hands  belonging  to  the  local  banker.  To  clear  the  books 
entirely  and  wipe  out  the  brokerage  Hability  due  other  brokers, 
credit  Cash  and  debit  the  brokerage  account  for  the  payment  of 
this  liability. 

The  handling  of  foreign  exchange  purchases  is  exactly  the 
same  as  exchange  sales,  except  that  the  entries  are  reversed,  being 
first  a  credit  to  Exchange  Purchases,  expressing  the  banker's  lia- 
bility, and  a  debit  to  the  foreign  correspondent's  account  for 
remittances  of  cables  or  drafts  to  him.  When  the  banker  pays 
out  the  cash  for  his  purchases  of  exchange,  he  debits  the  Exchange 
Purchases  account,  clearing  it  and  wiping  out  his  liability,  and 
credits  Cash  for  the  payments  made. 

Nostro  Interest  Claims  Receivable 

This  account  records  the  interest  claims  against  foreign 
correspondents  for  interest  arising  out  of  delayed  payments  on  the 
part  of  the  correspondent.  For  example,  a  banker  sells  a  cable 
to  a  customer  on  September  24,  which  he  estimates  will  be  paid  by 
his  foreign  correspondent  in  London  on  the  26th.  In  figuring  the 
interest  which  he  receives  from  the  correspondent  on  the  balances 
in  the  latter's  hands,  he  takes  account  of  the  balance  to  his  credit 
up  to  the  26th  and  then  figures  interest  on  his  new  balance  as 
reduced  on  that  date  by  the  amount  of  the  cable.  If  the  delivery 
of  the  cable,  and  therefore  its  payment,  are  delayed  for  some 


72  ACCOUNTING— THEORY  AND  PRACTICE 

reason  and  the  advice  received  from  the  correspondent  shows 
that  the  amount  was  paid  out  on  the  29th,  the  banker  will  be 
entitled  to  a  3  days'  interest  on  the  amount  of  the  cable  payment, 
which  the  banker  deducted  when  figuring  the  interest  on  his 
balances  abroad.  The  banker  may  either  debit  his  correspond- 
ent's account  with  the  claim  for  interest  and  credit  his  interest 
account,  or  if  there  is  any  doubt  of  the  correctness  of  the  claim, 
he  may  debit  a  special  account,  such  as  Nostro  Interest  Claims 
Receivable,  and  leave  it  there  until  the  claim  is  definitely  settled. 

Nostro  Accounts 

The  largest  portion  of  the  so-called  "accounts  receivable"  in 
foreign  exchange  is  found  in  the  noatro  accounts,  which  represent 
the  deposit  accounts  kept  by  the  foreign  exchange  banker  in  for- 
eign countries.  These  items  will  usually  be  shown  on  financial 
statements  under  headings  such  as  Due  Us  from  Foreign  Banks 
and  Bankers  or  Due  Us  on  Nostro  Accounts.  The  foreign 
exchange  business  still  retains  many  expressions  that  point  to  its 
Italian  origin,  and  nostro  accounts  as  well  as  the  opposite,  "  loro  " 
or  "vostro"  accounts  belong  to  this  category.  Nostro  (our) 
accounts  simply  mean  the  balances  which  we  keep  with  banks  or 
bankers  in  foreign  countries,  against  which  we  draw  as  the  need 
arises.  There  is  no  real  difference  between  the  New  York  banker 
keeping  a  deposit  account  in  a  Philadelphia  bank  and  the  same 
banker  keeping  a  deposit  account  in  a  London  or  Paris  bank, 
except  that  he  must  keep  track  of  the  transactions  with  the 
foreign  bank  in  both  American  and  foreign  units,  owing  to  the 
difference  in  currency  between  the  United  States  and  the  foreign 
country.  Just  as  the  banker  charges  his  Philadelphia  bank 
account  with  all  deposits,  and  credits  it  with  all  withdrawals,  so 
he  charges  the  nostro  account  with  all  remittances  and  credits 
it  with  all  drawings.  The  various  foreign  banks  and  bankers 
are  commonly  called  "correspondents,"  their  accounts  being 
divided  into  nostro  and  lore  accounts,  usually  kept  in  different 
ledgers. 


FOREIGN  EXCHANGE  ACCOUNTING  73 

The  transactions  that  find  their  way  most  frequently  into  the 
nostro  accounts  are: 

1.  Nostro  Accounts  Debits: 

Remittances  by  cable  for  customers'  accounts. 

Remittances  by  cable  (cable  transfers)  for  our  own  ac- 
count to  increase  the  credit  balance  abroad. 

Remittances  by  check  or  time  draft  for  customers'  or  our 
own  account. 

2.  Nostro  Accounts  Credits: 

Cable  drawings  or  cable  payments  for  customers'  or  our 

own  account. 
Letter  payments  or  delegations  for  customers'  accounts. 
Check  or  time  draft  payments  for  our  own  or  customers' 

accoimts. 

Letter  Payments  or  Delegations 

The  recording  of  the  sale  of  a  letter  payment  or  delegation  is 
somewhat  similar  to  that  of  a  cable.  A  letter  payment  is  an  order 
upon  a  foreign  correspondent  to  pay  money  to  a  certain  person 
for  the  account  of  another  person  in  this  country.  The  dele- 
gation is  sold  by  the  American  banker  to  his  customer  in  the 
United  States  at  a  lower  rate  than  the  cable,  because  the  banker 
has  the  use  of  his  credit  balance  abroad,  drawing  interest,  until 
the  time  when  the  letter  of  delegation  requesting  payment  reaches 
its  destination  abroad,  which  is  as  long  as  the  mail  steamer  and 
mail  transportation  take.  The  rate  at  which  the  delegation  is 
sold  is  about  the  same  as  that  for  bankers'  checks.  The  use  of 
delegations  to  pay  over  foreign  money  abroad,  usually  for  private 
and  personal  payments,  less  commonly  for  commercial  settle- 
ments, is  due  to  their  greater  simplicity  and  the  likelihood  that 
the  foreign  beneficiary  of  the  delegation  may  not  be  familiar  with 
the  use  of  bankers'  checks.  As  in  the  case  of  cables,  letters  of 
advice,  as  previously  shown,  are  sent  to  the  foreign  correspondent, 
giving  the  details  necessary  for  making  the  payments. 


74 


ACCOUNTING— THEORY  AND  PRACTICE 


Bankers'  Checks 

A  large  volume  of  business  in  sales  of  exchange  is  done  through 
the  medium  of  bankers'  checks,  or  sight  bills  of  exchange,  drawn 
by  the  American  banker  on  his  correspondent  abroad.  These 
bills  of  exchange,  or  bankers'  checks,  are  sight  drafts  drawn  in 
foreign  currency — pounds  sterling,  francs,  marks,  guilders,  etc. — 
on  the  foreign  correspondent  and  charged  by  the  latter  against 
the  money  balance  which  the  American  banker  maintains  abroad. 
The  checks  are  drawn  in  duplicate,  called  "first  of  exchange  "  and 
''second  of  exchange,"  and  are  sent  off  by  different  steamers. 
Whichever  check  is  first  presented  to  the  correspondent  is  paid. 
Under  normal  conditions  the  original  check  is  presented  first  and 
paid,  the  duplicate  thereby  being  rendered  void.  Care  must  be 
taken  by  the  correspondent  not  to  pay  the  same  check  twice, 
and  the  American  banker  likewise  must  be  careful  in  controlling 
and  watching  the  letters  of  advice  received  from  his  correspond- 
ents so  as  not  to  be  charged  twice  for  the  same  check.  In 
general,  no  trouble  is  experienced  with  duplicate  foreign  checks. 

As  a  rule  the  letter  of  advice  sent  to  the  correspondent,  as 
shown  in  Form  7,  contains  a  number  of  checks  which  have  been 


r- 

OFFICE  COPY 

THE  FOREIGN  EXCHANGE  BANK 
TO                                                                    ORIGINAL 

Dear  Sirs:-We  have  taken  the  liberty  to  draw  on  you  to-day  the  following  checks 
which  we  request  you  to  honor  to  the  debit  of  our 

LIO 

CK 

CHECK 
NUMBER 

PAYABLE  TO 

AMOUNT 

TOTAL 

RATE 

DOLLARS 

VALUE 

. 



■ 

L 

1               1                                                                                                      1 

Form  7.     Letter  of  Advice  for  Drafts  Drawn  on  Correspondent 


drawn  on  the  correspondent.  Note  that  the  letter  of  advice 
here  illustrated  permits  two  records  to  be  made  at  once  by  the 
use  of  carbon  copies,  the  short  copy,  containing  check  number, 
beneficiary,  and  amount  in  foreign  currency,  being  sent  to  the 


FOREIGN  EXCHANGE  ACCOUNTING  75 

correspondent,  the  long  copy  with  the  additional  information  as 
to  rate,  dollars,  and  value  date,  being  used  for  the  office  copy  and 
for  posting.  Other  systems  are  also  used.  Where  the  old-style 
stub  check  book  is  still  in  use,  an  entry  is  made  in  the  exchange 
sales  journal  to  record  the  sale  of  the  exchange,  and  in  a  draft 
record  book  to  help  locate  the  draft  later.  In  the  case  here 
shown  the  retained  copy  serves  as  a  sales  record,  the  totals  of  the 
various  days  being  transferred  to  a  recapitulation  sheet  and 
posted  in  total  to  the  Exchange  Sales  account  along  with  cable 
and  delegation  sales  of  exchange. 

II.  Ledgers  and  Accounts 

Ledgers 

Ledger  Records.  In  general  we  find  three  types  of  foreign 
exchange  ledgers  in  use:  (i)  the  nostro  (our  accounts)  ledgers, 
in  which  are  recorded  the  transactions  with  balances  which  we 
maintain  with  our  foreign  correspondent;  (2)  the  vostro,  or  loro 
(their  accounts),  ledgers,  in  which  are  recorded  the  transactions 
with  the  balances  maintained  by  the  correspondents  with  the 
American  banker;  and  (3)  the  general  ledger,  often  called 
"domestic"  ledger,  in  which  are  kept  controlling  accounts,  gen- 
eral accounts,  foreign  exchange  accounts  of  a  general  nature, 
accounts  with  customers  in  this  country,  and  most  of  the  income 
and  expense  accounts.  There  may  also  be  a  private  ledger  con- 
taining the  Capital  account,  certain  private  accounts,  and  the 
Profit  and  Loss  summary  account.  This,  however,  is  not 
peculiar  to  foreign  exchange. 

Nostro  Ledgers.  The  nostro  accounts  must  be  kept  both  in 
foreign  units  and  in  American  dollars.  The  foreign  currency 
record  must  be  kept  in  order  to  keep  track  of  the  fluctuations  in 
the  balances  kept  abroad  and  to  control  the  accuracy  of  charges 
and  credits  by  the  correspondent  resulting  from  the  various 
transactions.  The  dollar  values  must  be  maintained  for  trial 
balance  and  balance  sheet  purposes  and  for  figuring  the  profits  or 
losses  from  exchange  transactions. 


76  ACCOUNTING— THEORY  AND  PRACf  ICE 

The  information  necessary  to  record  nostro  transactions 
properly  is  the  following:  date  of  the  transaction,  particulars, 
i.e.,  name  of  customer  for  whom  the  transaction  was  executed  or 
the  name  of  party  abroad  to  whom  payment  is  to  be  made,  foreign 
currency  amount  transmitted  or  drawn,  value  date  as  estimated 
by  the  trader,  value  date  as  advised  by  the  correspondent,  record 
of  part  payments  and  of  totals  of  payments  depending  on  the 
nature  of  the  transaction,  and  jSnally  the  dollar  amounts  involved. 
There  are  as  many  different  arrangements  of  the  above  infor- 
mation as  there  are  foreign  exchange  offices.  Two  forms  of  nostro 
accounts  are  given,  one  making  entries  by  hand,  the  other  making 
use  of  bookkeeping  machines.  These  merely  illustrate  the 
general  idea  of  nostro  accounts  and  must  not  be  taken  as  setting  a 
standard  followed  by  all  banks. 

Form  8a  has  spaces  for  all  of  the  above  information,  as  well  as 
the  following  data : 

Numbers.     Office  record  of  the  number  of  the  transaction. 

Date  of  Confirmation.  This  gives  the  date  when  the  trans- 
action was  confirmed  by  letter  of  advice  from  the  correspondent. 

Value.  Value  date  from  which  interest  on  new  balance  must 
be  figured,  which  is  the  date  of  payment  of  the  draft  or  cable  or  the 
date  of  receipt  of  the  remittance.  This  date  should  agree  with 
the  preliminary  value  date  as  estimated  by  the  trader  and  placed 
in  a  special  column  or  filled  in  with  pencil  in  the  Value  Date 
column,  to  be  later  inked  in  when  this  or  another  date  is  confirmed 
by  the  correspondent. 

Charges.  Often  there  are  cable  charges  paid  by  the  corres- 
pondent, or  special  messenger  service,  or  other  special  charges 
which  will  be  taken  from  the  letter  of  advice  sent  by  the  corres- 
pondent and  credited  here. 

Foreign  Amount  in  Detail.  Quite  frequently  a  large  amount 
may  be  drawn,  but  payable  only  at  various  intervals.  For 
example,  an  American  importer  may  buy  a  cable  of  £100,000  to 
be  paid  at  intervals  of  one  month  at  the  rate  of  £20,000  to  differ- 
ent payees.     The  different  amounts  of  £20,000  would  go  in  this 


FOREIGN  EXCHANGE  ACCOUNTING 


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78  ACCOUNTING— THEORY  AND  PRACTICE 

column,  and  the  total  amount  in  the  column,  Foreign  Amount  in 
Total. 

Reconcilement  Check.  At  stated  periods,  either  monthly, 
quarterly,  or  semiannually,  foreign  correspondents  send  to  the 
American  banker  statements  of  the  status  of  the  deposit  account 
showing  transactions  and  balances,  while  the  latter  does  the  same 
with  his  vostro  accounts  for  the  foreign  correspondents.  The 
staff  of  the  exchange  banker  must  reconcile  the  statement  re- 
ceived from  the  correspondent  with  the  ledger  account  in  the 
nostro  ledger,  so  that  the  check  ''tick"  and  usually  the  initial 
letter  of  the  month  in  which  the  transaction  appeared  in  the 
correspondent's  statement  are  placed  in  this  colimui. 

The  other  columns  are  self-explanatory. 

Form  8b  offers  about  the  same  details  as  to  columns,  except 
that  here  a  daily  balance  is  carried,  enabling  the  trial  balance  to 
be  taken  off  at  any  time. 

Old  Balance.  This  is  always  the  starting  balance  for  the 
machine  and  acts  as  a  proof  for  the  last  previous  balance  appear- 
ing in  the  colvunn.  Daily  Balance.  For  example,  if  on  January  6, 
the  daily  balance  was  $25,500,  then  the  next  line  in  the  Old 
Balance  column  should  show  the  same  amount,  $25,500,  thus 
proving  that  the  bookkeeper  on  the  next  day  of  entry,  which  may 
be  January  10,  picked  up  the  right  balance  from  the  Daily  Bal- 
ance column. 

Preliminary.  This  column  under  Debit  Foreign  Amount  and 
Credit  Foreign  Amount  is  equivalent  to  the  column,  Foreign 
Amount  in  Detail,  explained  above.  There  is  another  use  for 
it,  however,  which  is  more  important.  It  often  happens  that 
the  American  banker  instructs  his  correspondent  to  make  pay- 
ments to  which  will  be  added  certain  charges,  the  amount  of 
which  is  not  known  to  the  American  banker.  In  this  form  of 
ledger,  which  has  no  special  column  for  such  charges,  the  amount 
as  drawn  and  advised  is  entered  in  the  Prehminary  column 
and  the  fmal  amount,  including  the  charges  as  advised  back  by 
the  correspondent,  is  entered  in  the  final  foreign  currency  column. 


FOREIGN  EXCHANGE  ACCOUNTING 


79 


Value  Date.  This  column  is  used  to  enter  the  value  date  as 
estimated  by  the  trader  and  as  advised  to  the  foreign  corres- 
pondent by  the  bank  and  takes  the  place  of  the  pencil  notation 
used  in  the  previous  form. 

Value.  This  column  is  used  to  enter  the  value  date  as  advised 
by  the  correspondent  in  his  letter  of  advice. 

No  special  column  is  here  provided  for  the  reconcilement 
check. 

The  entries  in  the  nostro  ledgers  may  be  simimarized  as 
follows : 

Nostro  Accoimts — Foreign  Correspondent 


Remittances  by  cable  or  draft 

Drawings    of    cables,   delegations, 

Payments  by  banker  for  his  own  ac- 

and checks 

count 

Payments    by    correspondent    for 

Purchases  by  banker  for  his  account 

banker's  account 

Collections   by   correspondent   for 

Sales  by  correspondent  for  banker's 

banker's  account 

account 

Interest  claims  due  the  banker  on 

Interest  adjustments  due  the  corre- 

balances 

spondent  on  balances 

Banker's  share  of  profits  (if  joint 

Correspondent's  share  of  profits  (if 

account) 

joint  account) 

After  the  individual  debit  or  credit  entries  have  been  made 
in  the  correspondent's  nostro  account,  showing  both  foreign 
currency  and  dollar  equivalents,  nothing  can  be  done  until  con- 
firmation of  the  transaction  is  received  from  the  correspondent. 
After  a  certain  lapse  of  time,  depending  on  the  mail  service 
between  the  countries,  a  letter  will  be  received  from  the  foreign 
correspondent,  stating  that  in  accordance  with  the  cable  or  check 
received  from  the  American  banker  payment  was  made  on  a  cer- 
tain date  by  the  foreign  banker  to  the  party  specified.  This 
letter  of  advice  is  checked  in  detail  against  the  copy  of  the  letter  of 
advice  originally  sent  to  the  correspondent  at  the  time  of  the 
transaction.  If  the  payee,  amount  paid,  value  date,  and  other 
details  agree  with  the  original  advice,  the  letter  is  marked  "  Cor- 


8o  ACCOUNTING— THEORY  AND  PRACTICE 

rect"  and  passed  on  to  the  bookkeeper.  The  latter  then  com- 
pares the  details  in  the  advice  with  the  ledger  entry  made  at  the 
time  the  transaction  occurred,  enters  the  final  value  date  in  the 
proper  ledger  column  as  well  as  any  charges,  or,  in  the  case  of 
Form  8b,  enters  the  final  foreign  currency  amount  in  the  proper 
column.     The  letter  of  advice  is  then  ready  to  be  filed. 

Reconciliation  of  Accounts 

•  At  the  end  of  the  month  or  quarter  a  statement  is  received 
from  the  correspondent,  giving  the  various  balances  after  remit- 
tances have  been  credited  and  drawings  charged  by  him  to  the 
American  banker's  deposit  account.  His  statement  is  ac- 
companied by  a  schedule  showing  the  daily  balances  and  the 
debit  and  credit  interest  charges  against  them  and  the  final  in- 
terest figure  which  agrees  with  that  in  the  statement.  These 
figures  are,  of  course,  all  in  foreign  currency  units,  as  the  cor- 
respondent is  not  interested  in  the  banker's  dollar  amounts. 
Obviously  the  nostro  account  in  the  American  banker's  ledger 
is  a  loro  account  in  the  correspondent's  ledger. 

On  American  Banker's  Books  On  Correspondent's  Books 

Our  Balances  with  Correspondent 

Nostro  accounts  in  foreign  currency      Loro  accounts  in  foreign  currency 

and  American  dollars  only 

(our  trial  balance  in  American  cur- 
rency) 

His  Balances  with  Us 
Loro  accounts  in  American  dollars      Nostro    accounts    in    American 
only  dollars  and  foreign  currency 

(his  trial  balance  in  foreign  cur- 
rency) 

It  should  be  remembered  that  the  balance  which  he  shows  to 
our  credit  in  foreign  currency  (sterling)  will  differ  from  the 
sterling  balance  which  the  American  banker's  nostro  account 
shows  in  our  favor,  as  there  will  be  drawings  and  remittances 
made  and  recorded  on  this  side,  which  arrived  abroad  too  late  to 


FOREIGN  EXCHANGE  ACCOUNTING  8 1 

be  paid  or  entered  on  the  books  at  the  date  of  the  statement.  It 
therefore  becomes  necessary  to  reconcile  the  foreign  correspond- 
ent's statement  with  the  American  banker's  books  and  to  that  end 
the  reconciliation  form  shown  in  Form  9  can  be  used. 

It  will  be  noted  that  four  different  types  of  adjustment  are 
necessary  to  effect  a  reconciUation.  It  is  immaterial  whether 
we  begin  with  our  book  balance  and  end  with  the  correspondent's 
statement  balance,  or  whether  we  begin  with  his  balance  and  end 
with  our  book  balance.  The  principle  is  the  same  in  either  case. 
The  statement  must  be  checked  with  the  nostro  account  item 
for  item  both  as  to  details,  amounts,  and  value  dates,  the  best 
method  being  to  place  a  tick  and  the  initial  of  the  month  in  which 
the  item  appeared  on  the  correspondent's  statement  next  to  the 
item  in  our  ledger  account.  This  helps  to  locate  at  a  future  date 
items  that  may  be  open  to  question. 

Exchange  Purchases 

While  little  has  been  said  about  transactions  such  as  pur- 
chases of  cables,  time  drafts,  acceptances  by  an  American  banker 
for  remittance  to  his  foreign  correspondent,  the  proceeds  to  be 
placed  to  the  credit  of  the  American  banker's  deposit  account 
abroad,  it  is  obvious  that  these  transactions  follow  the  same  line 
of  reasoning  as  the  ones  discussed  in  the  preceding  sections,  except 
that  the  debit  and  credit  entries  are  the  reverse  of  the  former  ones 
dealing  with  the  sale  of  exchange.  'Where  in  the  above  entries 
a  credit  note  was  sent  to  the  foreign  correspondent,  crediting  his 
account  for  payments  made,  in  the  present  case  a  debit  note  is 
sent,  debiting  his  account  for  remittances  sent. 

The  two  forms  here  shown  (Forms  loa  and  b)  are  sent  with 
remittances  of  long-time  drafts,  bought  by  the  American  banker 
in  the  home  market  for  discount  abroad  or  to  be  presented  to 
bankers  abroad  for  acceptance,  and  the  proceeds  credited  to  the 
American  banker's  deposit  account.  In  these  instances  the  nostro 
account  of  the  foreign  correspondent  is  debited  in  his  nostro  ledger 
by  the  American  banker,  thus  building  up  his  balance  abroad. 

VOL.  Ill — 6 


S2 


ACCOUNTING— THEORY  AND  PRACTICE 


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FOREIGN  EXCHANGE  ACCOUNTING 


83 


NEW  YORK 


ORIGINAL 


Dear  Slrs^ 

You  will  receive  on 
as  per  specifications  below,  which  please  pass  to  the  credit  of  our  account 

Very  truly  yours, 
THE  FOREIGN   EXCHANGE  BANK 


NO.       TENOR 


DRAWER 


DRAWEE 


AMOUNT 


OFFICE  COPY 


DR. 

FOLIO 

CHECK 

UNT       RATB     DOLLARS    VALUE 


Form  10.     (o)  Debit  Note  Form  to  Foreign  Correspondent  for  Discount 


DEAR  SIRSi 

WE  TAKE  THE  LIBERTY  OF  SENDING  YOU  THE  REMITTANCES  SPECIFIED  BELOW^.  WHICH 
PLEASE  HAVE  ACCEPTED  AND 
ADVISING  US  OF  THE  DUE  DATE, 

THANKING  YOU  IN  ANTICIPATION,  WE  REMAIN. 
VERY  TRULY  YOURS. 
THE  FOREIGN  EXCHANGE  BANK 

PLEASE  ADVISE    US    fN   CASE  THE  ABOVE  REMITTANCE  (s) 
HAS  (HAVE)  BEEN    ACCEPTED     WITH     A   DELAY.    MENTIONINQ 
REASON  IF  POSSIBLE. 

NO. 

TENOR 

DRAWER 

DRAWEE    . 

AMOUNT 

Form  10.     (b)  Debit  Note  Form  to  Foreign  Correspondent  for  Acceptance 


84       ACCOUNTING— THEORY  AND  PRACTICE 

Steamer  Proof 

An  expression  peculiar  to  foreign  exchange  is  "proving  the 
steamer."  When  foreign  exchange  has  been  sold,  the  various 
bankers'  checks,  time  bills  of  exchange,  and  letters  of  advice  are 
collected  and  segregated  by  steamers  sailing  to  the  ports  of  the 
countries  on  which  the  exchange  is  drawn.  The  "steamer  proof  " 
is  merely  an  internal  check  which  can  be  applied  to  see  whether 
the  cash  received  for  sales  of  exchange  and  the  cash  to  be  expected 
agree  with  the  total  of  foreign  exchange  sales.  As  the  exchange  is 
sent  out  by  a  certain  steamer  this  makes  a  good  date  for  checking 
and  gives  an  effective  internal  proof.  We  have  learned  that  a 
bill  is  made  out  to  the  customer  to  whom  the  exchange  was 
sold  and  that  a  duplicate  of  this  bill  is  given  to  the  foreign  ex- 
change cashier,  who  files  it  until  the  customer  remits.  When  the 
customer  remits  the  cash,  the  cashier  removes  the  bill  from  the 
unpaid  file  and  sends  it  to  the  paid  file.  When  proving  the 
amount  of  unpaid  duplicate  bills  in  his  file,  the  total  should  equal 
the  debit  balance  remaining  in  the  Exchange  Sales  account,  which 
equals  the  "steamer."     We  may  set  up  the  equation  as  follows: 

Credit  Side  of  Exchange  Sales  +  Unpaid  Bills  (Steamer)  =  Debit  Side  of 

Exchange  Sales 

Joint  and  Arbitrage  Accounts 

Two  accounts  frequently  found  in  nostro  ledgers  are  the  Joint 
account  and  the  Arbitrage  account.  The  Joint  account  repre- 
sents a  joint  venture  in  which  the  profits  or  losses  are  shared 
in  a  certain  proportion,  perhaps  50-50  by  the  parties.  Foi 
example,  an  American  banker  may  enter  into  an  agreement  with 
an  English  banker  that  all  transactions  between  the  two  houses 
dealing  with  foreign  exchange  are  to  be  on  a  50  per  cent  profit- 
sharing  basis.  This  does  not  in  any  way  change  the  operations  of 
the  traders  or  the  workings  of  the  accounting  system.  It  simply 
means  that  all  transactions  coming  within  the  joint  venture  will 
be  recorded  in  a  special  Foreign  Exchange  joint  account  in  the 
nostro  ledger.    When  the  American  banker  figures  his  profits  he 


FOREIGN  EXCHANGE  ACCOUNTING  85 

credits  his  foreign  correspondent  with  the  latter's  half  of  the  same. 
In  a  like  manner  the  English  banker  will  credit  his  American 
correspondent  with  the  half  of  the  profits  made  by  the  former 
in  the  London  market,  so  that  in  due  course  the  American  banker 
may  debit  the  foreign  correspondent  in  the  Joint  account  with 
the  profits  made  under  the  joint  agreement  by  the  foreign  banker. 
The  Arbitrage  account  is  based  on  the  so-called  "arbitrage 
transactions  "  in  which  the  trader  engages.  Arbitrage  may  be 
briefly  explained  as  follows:  The  American  trader  notes  that 
English  pounds  sterling  sell  at  a  higher  rate  in  the  New  York 
market  than  they  do  in  the  Paris  market.  In  order  to  take 
advantage  of  this  more  favorable  rate  between  London  and  Paris 
(disparity  of  rates)  he  buys  the  sterling  in  Paris  instead  of  in  New 
York.  The  entry  for  this  transaction  in  the  nostro  ledger  would 
be  as  follows: 

Arbitrage — London   correspondent,    £  10,000    at 

$3-75 $37,500.00 

Arbitrage — Paris  correspondent  with  equiv- 
alent amount  in  francs,  depending  on 
rate  of  exchange  between  London  and 
Paris $37,500.00 

Note  that  while  the  amounts  in  foreign  currency  differ, 
owing  to  the  different  units  and  rates  of  exchange,  the  American 
dollars  are  the  same,  since  we  merely  use  a  given  number  of 
dollars  to  buy  sterling  in  Paris  instead  of  in  New  York.  In  effect, 
the  American  banker  has  drawn  francs  on  his  French  banker  and 
increased  his  sterling  balance  with  his  London  banker. 

He  now  has  £10,000  in  his  London  bank,  purchased  at  alow 
rate  through  Paris,  against  which  he  can  draw  in  New  York,  by 
selling  exchange  in  New  York  at  the  higher  New  York  rate,  thus 
making  a  profit.  Arbitrage  may  be  between  two  or  more  points 
in  various  countries  and  requires  a  skilful  trader  and  rapid  ma- 
nipulation to  be  successful.  It  may  be  likened  to  a  circle,  since 
the  American  banker  begins  by  expending  dollars  to  buy  foreign 


86  ACCOUNTING— THEORY  AND  PRACTICE 

exchange  in  a  foreign  market,  and  ends  by  receiving  dollars  from 
his  American  customers  through  the  sale  of  exchange  to  them  at  a 
higher  rate  than  that  at  which  he  bought  it.  Where  arbitrage  is 
carried  on  only  infrequently,  the  transactions  can  be  recorded  in 
the  regular  nostro  correspondents'  accounts,  but  where  they  occur 
in  large  numbers  it  is  better  to  keep  them  in  separate  arbitrage 
accounts,  sometimes  called  "duo"  or  "trio"  accounts,  depend- 
ing upon  whether  two  or  three  money  centers  are  involved. 

Lore  Accounts 

There  is  a  second  class  of  balances  maintained  by  the  foreign 
banker  in  this  country,  called  "dollar"  balances,  which  bear 
exactly  the  same  relation  to  the  foreign  banker  that  our  foreign 
deposits  bear  to  the  American  banker.  In  other  words,  the 
American  banker  maintains  sterling  balances  in  London,  while 
the  English  banker  maintains  dollar  balances  in  New  York.  The 
bookkeeping  for  these  dollar  balances  is  simpler  than  for  the 
nostro  accounts,  as  no  foreign  currency  record  need  be  kept  of 
the  transactions.  The  foreign  banker  makes  dollar  remittances 
or  draws  dollar  drafts  on  his  dollar  balance,  and  foreign  currency 
does  not  enter  into  the  matter  so  far  as  the  American  banker  is 
concerned.  Hence  there  is  no  need  for  him  to  record  anything 
but  American  dollars.  Just  as  the  foreign  banker  allows  the 
American  banker  interest  on  his  foreign  balances,  so  the  Ameri- 
can banker  allows  interest  on  dollar  deposits  to  the  foreign  banker. 
Every  month  as  a  rule  the  American  banker  sends  a  statement 
of  the  dollar  account  to  his  foreign  correspondent,  who  checks  it 
and  reconciles  it  with  his  books  exactly  as  the  American  banker 
does  with  his  nostro  accounts. 

Commercial  Letters  of  Credit 

These  transactions  make  up  a  great  volume  of  the  foreign 
exchange  business  and  at  the  same  time  have  an  important  bear- 
ing on  the  import  and  export  trade  of  the  country.  Practically 
all  of  the  nation's  exporting  and  importing  is  carried  on  through 


FOREIGN  EXCHANGE  ACCOUNTING  87 

the  medium  of  letters  of  credit  and  bills  of  exchange.  It  is  not 
often  that  actual  gold  bullion  passes  between  the  countries  to 
settle  commercial  balances.  In  most  instances  the  credit  of 
banks  and  bankers  and  their  correspondents  in  the  various  coun- 
tries furnishes  the  means  to  this  end.  It  is  not  within  the  scope 
of  this  chapter  to  discuss  in  detail  the  methods  of  financing  inter- 
national trade,  but  we  may  at  least  take  a  typical  case  and  follow 
the  transactions  through  the  foreign  exchange  banker's  books. 

Assume  that  the  International  Trading  Corporation  wishes  to 
import  merchandise  from  France.  The  company  approaches 
an  American  banker  having  branches  or  correspondent  bankers  in 
France  with  a  request  to  open  a  letter  of  credit.  This  is  called  a 
''commercial  letter  of  credit"  (C.L.C.)  as  against  the  travel- 
ers' letter  of  credit  (T.L.C.).  The  banker  has  two  ways  of 
handling  this  request.  If  the  standing  of  the  corporation  war- 
rants, he  may  grant  an  unsecured  credit,  merely  requesting  a 
trust  receipt  or  warehouse  receipt  covering  the  merchandise  upon 
arrival  in  this  country.  If  he  desires  greater  security,  he  may 
grant  a  secured  letter  of  credit,  whereupon  he  will  request  the 
customer  to  deposit  collateral  in  the  form  of  securities  to  be  held 
by  him  during  the  life  of  the  credit.  Under  the  letter  of  credit 
granted  either  in  favor  of  the  customer  or  in  favor  of  some 
definitely  named  agent  abroad,  such  as  a  French  exporting  house, 
the  bank  will  accept  all  drafts  drawn  on  itself  by  the  foreign 
exporter  or  by  the  importer  against  the  imports.  Generally  the 
acceptor  bank  will  demand  that  bills  of  exchange  presented  for 
acceptance  must  be  accompanied  by  shipping  documents,  bills 
of  lading,  consular  invoices,  marine  insurance  papers,  and  other 
similar  documents.  In  this  case — documents  upon  acceptance 
(D/A) — the  documents  are  surrendered  to  the  bank  with  the  draft. 
The  bank  detaches  the  documents  from  the  draft,  accepts  the 
latter,  returns  it  to  the  present  holder,  usually  the  correspondent 
bank  or  the  agent  of  the  French  exporter  who  drew  the  draft,  and 
notifies  the  American  importer  that  the  documents  will  be  sur- 
rendered to  him  upon  trust  receipt  covering  the  merchandise 


88  ACCOUNTING— THEORY  AND  PRACTICE 

imported.  The  importer  is  now  able  to  take  possession  of  the 
goods  and  place  them  on  the  market  for  sale,  eventually  collecting 
the  money  necessary  to  meet  the  draft  which  matures  in  from  60 
to  90  days  or  longer.  The  bank  retains  a  lien  upon  the  goods 
until  the  draft  has  been  met.  Meanwhile  the  correspondent's 
bank  or  agent  holds  the  American  bank's  acceptance,  which  is 
prime  commercial  paper  and  can  easily  be  discounted  in  the 
market.  The  French  exporter  received  his  money  when  he  sold 
the  draft  which  he  drew  in  Paris  to  his  Jocal  banker  and  received 
credit  for  the  proceeds. 

Under  certain  conditions  the  American  banker  may  not  care 
to  accept  the  draft  against  surrender  of  documents  and  may  in- 
sist upon  payment,  documents  upon  payment  (D/P),  before 
surrendering  the  docmnents  to  the  importer.  This,  however,  is 
rare  where  the  drawee  is  a  bank,  but  is  quite  common  where  the 
drawee  is  a  merchant,  whose  credit  naturally  is  not  so  well  estab- 
Hshed. 

Issue  of  Letters  of  Credit 

When  the  bank  opens  a  credit  to  the  account  of  the  American 
importer  it  creates  a  contingent  liability  which  at  any  time  may 
become  a  real  liability.  The  contingent  liability  arises  from  the 
agreement  by  the  bank  to  allow  the  merchant  the  use  of  the  credit 
standing  of  the  bank  under  the  letter  of  credit  granted,  and  this 
may  lead  to  a  foreign  draft  drawn  by  some  exporter  being  pre- 
sented for  acceptance,  creating  a  real  bills  payable  liability. 

Numerous  systems  are  in  use  to  keep  track  of  this  contingent 
liability.  Some  banks  use  a  letter  of  credit  ledger  in  which  each 
customer  has  an  account,  showing  the  credit  limit  and  terms 
of  the  letter  of  credit,  as  well  as  other  needed  information,  entries 
being  made  to  record  drafts  accepted,  due  dates,  payments  to  be 
made,  etc.  A  better  system  is  a  loose-leaf  record  with  columns 
giving  the  following  information:  credit  limit,  date  of  drafts 
drawn,  tenor,  amount,  maturity,  date  of  acceptance,  payments 
made  by  the  customer  against  drafts,  total  real  liability  of  the 


FOREIGN  EXCHANGE  ACCOUNTING  89 


Please  take  note  that  we  have  issued 

Letter  of  Credit  No dated for . 

Account 

Favor 

For .' 


Expires 

Drafts  at to  be  accompanied  bj' 


Insurance Commission . 

Very  truly  yours, 


THE  FOREIGN  EXCHANGE  BANK 


Form  II.     Notificaiion  oj  Granting  Letter  oj  Credit 


90  ACCOUNTING— THEORY  AND  PRACTICE 

customer,  total  real  liability  of  the  bank,  total  contingent  liability 
of  the  bank.  When  the  credit  is  first  opened  there  is  only  a 
contingent  liability  on  the  part  of  the  bank.  When  drafts  are 
accepted  the  contingent  liability  decreases  and  the  real  lia- 
bihty  increases.  As  the  customer  makes  payment  against  the 
acceptances  or  discounts  the  drafts  before  maturity,  the  real 
liability  decreases  and  the  contingent  liability  increases  again. 
This  method  has  the  advantage  of  showing  the  fluctuations  of 
both  the  real  and  the  contingent  liability  of  the  bank  and  of  the 
customer's  liability  to  the  bank  at  all  times. 

At  the  time  the  bank  grants  the  letter  of  credit  a  notice  may 
be  sent  to  the  customer  worded  somewhat  as  in  (Form  ii). 

The  entries  to  be  passed  when  granting  this  letter  will  depend 
entirely  upon  whether  the  bank  considers  the  contingent  liability 
one  to  be  shown  in  the  financial  statement  only  as  a  footnote  or 
as  an  addition  to  its  other  liabilities.  In  the  former  case  no  en- 
tries need  be  passed  but  in  the  latter  case  the  contingent  liability 
will  be  offset  on  the  asset  side  by  a  contingent  claim  against 
customers  under  letters  of  credit.    They  might  be  as  follows: 

Customers'  Liability  under  Letters  of  Credit $ 

Commercial  Letters  of  Credit  Issued $ 

To  record  obligation  of  customers  to  reimburse 
bank  for  engagements  to  pay  or  accept  com- 
mercial bills  of  exchange  or  documents  and 
to  show  contingent  liability  of  bank  arising 
from  engagements  to  pay  or  accept  commer- 
cial documents. 

Acceptance  of  Drafts 

Let  us  assume  that  a  draft  with  documents  attached  is  pre- 
sented to  the  bank  for  acceptance,  the  terms  being  D/A.  After 
examination  of  all  the  documents  and  verification  of  the  credit 
limit  and  liability  on  the  books,  the  bank  accepts  the  draft, 
thereby  creating  a  real  liability.  The  acceptance  is  entered  in  an 
acceptance  register,  along  the  lines  of  the  form  shown  in  Form  12, 
giving  all  the  essential  information  about  the  acceptance.     In 


FOREIGN  EXCHANGE  ACCOUNTING 


91 


this  form  the  number  given 
to  the  acceptance  by  the 
bank  is  placed  in  the  Number 
column,  followed  by  the  due 
date  on  which  the  draft  ma- 
tures. The  names  of  the 
drawer  and  payee  or  the 
name  of  the  customer  for 
whom  the  draft  was  accepted 
may  follow.  The  amount  of 
the  draft  goes  into  the  Bills 
Payable  column.  The  total 
of  this  column  at  the  end  of 
the  day  is  posted  to  the  credit 
of  Bills  Payable,  recording  the 
acceptance  liability.  Letter 
of  Credit  (L/C)  Sundries  ac- 
count will  be  debited  with 
amounts  for  customers  with- 
out special  letter  of  credit 
accounts,  while  Individual 
Letter  of  Credit  accounts  will 
be  debited  with  amounts  be- 
longing to  them.  The  other 
columns  are  for  profit  and  loss 
accounts  and  summary  post- 
ings are  made  from  them  to 
the  proper  ledger  accounts. 
The  Letter  of  Credit  Sundries 
and  the  Individual  Letter  of 
Credit  Accounts  columns  rep- 
resent the  claims  against  cus- 
tomers under  the  acceptances. 
While  these  are  the  names 
used  in  the  form  given,  others 


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ACCOUNTING— THEORY  AND  PRACTICE 


may  be  employed.  A  better  title  for  our  purposes,  commonly 
found  in  banks,  is  Customers'  Liability  on  Acceptances  under 
Letters  of  Credit,  which  is  a  controlling  account  supported  by 
charges  to  the  individual  letter  of  credit  accounts  of  the  customers 
for  whom  drafts  were  accepted.    The  entry  would  then  be: 

Customers'  Liability  on  Acceptances  under  Letters  of 

Credit $ 

Bills  Payable  (Acceptances) $ 

To  record  obligation  of  customers  to  reimburse 
bank  for  commercial  drafts  accepted  payable 
at  a  future  date  and  to  show  bank's  liability 
through  acceptance  of  drafts  against  foreign 
shipments  of  merchandise  payable  at  a 
future  date. 

At  the  same  time  that  the  acceptance  is  entered  in  the  accept- 
ance register,  a  similar  entry  is  made  in  the  acceptance  maturity 


ACCEPTANCE  MATURITY  RECORD 

DATE 

NO. 

DUE 
DATE 

NAME 

ANTICIPATION 

BILLS 
PAYABLE 

_-_^_J 

Form  I  J.'    Acceptance  Maturity  Record 

record  (Form  13).  This  record  acts  as  a  tickler,  reminding  the 
clerk  in  charge  of  it  that  on  a  certain  date  the  maturing  accept- 
ance will  have  to  be  met.  The  record  gives  the  number  of  the 
acceptance,  the  due  date,  the  name  of  the  customer  for  whose 
account  the  acceptance  was  given  and  who  is  to  reimburse  the 
banker  for  the  payment  of  the  acceptance.  The  Anticipation 
column  will  show  those  drafts  which  have  been  paid  prior  to 
maturity,  in  other  words,  where  the  demand  upon  the  customer 
for  payment  on  the  due  date  has  been  anticipated.  The  date  of 
the  maturity  record  itself  will  be  a  day  or  so  before  the  due  dates 


FOREIGN  EXCHANGE  ACCOUNTING  93 

of  the  acceptances  on  which  cover  may  be  expected  from  the 
customers. 

Cover  and  Payment  of  Accepted  Drafts 

Simultaneously  with  the  acceptance  of  the  draft  by  the  banker, 
a  notice  is  sent  to  the  customer  to  whom  the  original  letter  of 
credit  was  issued,  informing  him  that  the  banker  has  accepted 
the  draft  presented  and  giving  both  its  maturity  date  and  also 
the  date  on  which  the  banker  will  expect  a  remittance  from  the 
customer  to  cover  the  acceptance.  The  cover  date  will  us- 
ually precede  the  due  date  by  one  or  more  days,  to  give  the 
banker  time  to  deposit  the  customer's  remittance  and  so  fur- 
nish the  funds  for  the  payment.  A  form  used  for  notification 
to  the  customer  is  here  shown  in  Form  14. 


NEW  YORK 19 

Messrs 

Dear  Sirs: 

We  beg  to  inform  you  that 

have  accepted  for  your  account  in  virtue  of  our  letter  of  Credit  No 

the  draft  of 


For which  plus  a  commission 

of % 


will  fall  due  in on and  must  be 

provided  for  at  our  New  York  Office  on of  which 

please  take  note. 

Yours  very  truly, 

THE  FOREIGN  EXCHANGE  BANK 


Form  14.     Notification  oj  Cover  against  Acceptances 

Now  let  us  assume  that  the  due  date  of  the  acceptance  has 
approached  and  that  the  latter  will  be  presented  at  the  bank 


94  ACCOUNTING— THEORY  AND  PRACTICE 

where  it  is  payable  as  mentioned  in  the  draft.  This  is  the  bank 
where  the  foreign  exchange  banker  keeps  his  account  and  which 
will  honor  the  acceptance  and  charge  the  banker  with  the  amount. 
The  banker  by  the  aid  of  his  maturity  record  knows  just  when 
acceptances  will  fall  due,  and  through  his  cash  record  will  credit 
the  bank  for  the  payment  and  debit  Bills  Payable  each  day  to 
liquidate  his  liability.     The  entry  made  in  his  cash  record  is : 

Bills  Payable  (Acceptances) $ 

Cash  (The  Correspondent  Bank) $ 

To  credit  the  bank  with  payment  of  accept- 
ances falling  due  on  this  date  and  liquidate 
the  liability  on  the  books. 

Unless  the  customer  for  whose  account  the  draft  was  accepted 
has  remitted  funds  to  his  foreign  exchange  banker  to  meet  this 
payment,  the  banker  would  have  to  use  his  own  funds  and  would 
be  entitled  to  charge  his  customer  interest  for  the  use  of  the 
money.  As  a  rule,  however,  a  remittance  is  received  prior  to  the 
date  of  maturity,  whereupon  the  banker  passes  the  following 
entry  through  his  cash  record: 

Cash $ 

Customers'    Liability    on    Acceptances    under 

Letters  of  Credit $ 

To  record  receipt  of  cover  to  meet  drafts, 
maturing  on  a  certain  date. 

The  check  received  from  the  customer  is  deposited  in  the  bank 
at  which  the  draft  is  payable  and  furnishes  the  funds  to  meet  the 
charge  to  the  foreign  exchange  banker's  account  by  the  bank 
where  he  keeps  his  deposit.  The  credit  to  Customers'  Liability 
on  Acceptances  under  Letters  of  Credit  correspondingly  reduces 
the  banker's  claim  on  the  customer.  Where  the  foreign  exchange 
house  is  a  bank  with  which  the  customer  keeps  a  deposit  account, 
cover  of  acceptances  is  much  simpler,  as  the  bank  merely  charges 
the  customer's  account  with  the  maturing  acceptance.  The 
customer  must,  however,  see  to  it  that  he  has  a  sufficient  balance 
on  deposit  to  meet  his  obligation. 


FOREIGN  EXCHANGE  ACCOUNTING  95 

Discounting  Bills  of  Exchange 

Another  transaction  connected  with  acceptances  arising  out 
of  the  export  and  import  business  appears  in  the  trial  balance  as 
an  asset  with  an  exactly  offsetting  liability,  as  follows: 

Bills  of  Exchange  Discounted $ 

Bills  of  Exchange  Rediscounted $ 

One  source  of  income  of  a  foreign  exchange  bank  is  from  the 
discount  of  prime  commercial  paper  (bills  accepted  by  other 
banks)  for  its  customers,  making  a  certain  profit  thereby.  The 
bank  cannot  always  afford  to  hold  these  bills  until  maturity 
and  so  it  rediscounts  them,  receiving  cash,  but  losing  some  dis- 
count, and  sets  up  the  contingent  liability,  Foreign  Bills  Redis- 
counted, which  will  disappear  when  the  bills  are  paid  by  the 
drawee  at  maturity.  As  only  prime  paper  is  sold  by  the  bank 
under  the  Federal  Reserve  Act  there  is  no  risk.  It  should  be  noted 
that  the  intermediate  entries  for  cash  disappear,  and  that  under 
normal  conditions  the  discount  credited  should  be  greater  than 
the  discount  debited,  yielding  a  profit  to  the  discoimting  bank. 
The  complete  cycle  of  entries  would  be  as  follows: 

(i)  Bills  of  Exchange  Discounted $10,000.00 

Cash $  9,900.00 

Interest  (Discount) 100.00 

To  record  discounting  of  foreign  bills 
for  customer. 

(2)  Cash 9,960.00 

Interest  (Discount) 40.00 

BUls  of  Exchange  Rediscounted 10,000.00 

To  record  rediscounting  of  foreign 
bills  to  federal  reserve  or  other 
banks. 

The  net  result  is  an  increase  in  the  asset,  cash,  and  a  credit 
of  $60  to  the  Interest  Income  account. 

Miscellaneous  Letter  of  Credit  and  Draft  Transactions 

Unmatured  Acceptances.  It  frequently  happens  that  a  cus- 
tomer will  prepay  or  anticipate  unmatured  acceptances,  in  which 


96  ACCOUNTING— THEORY  AND  PRACTICE 

case  the  bank's  liability  account,  Bills  Payable  (Acceptances), 
is  reduced  and  a  credit  to  the  Unmatured  Acceptances  account  is 
substituted.  At  maturity  this  latter  account  is  charged  anci 
Cash  credited  for  the  payment  of  the  bill. 

Acceptances  by  Foreign  Correspondents.  Aside  from  a  bank's 
liability  arising  from  its  own  acceptances  under  letters  of  credit 
for  the  account  of  foreign  customers,  it  may  also  incur  liabilities 
from  the  acceptance  by  its  foreign  correspondents  of  drafts 
drawn  under  letters  of  credit  issued  by  it.  In  this  case  the 
American  banker  upon  advice  from  his  correspondent  of  accept- 
ance of  a  draft,  will  charge  the  customer  for  whose  account  the 
draft  was  accepted  and  credit  the  account,  Acceptances  by 
Foreign  Correspondents. 

Customers'  Liability  on  Acceptances  under  Letters 

of  Credit $ 

Acceptances  by  Foreign  Correspondents $ 

At  maturity  the  customer  will  provide  cover  for  the  American 
banker,  who  may  record  the  transaction  as  follows: 

Cash $ 

Customers'    Liability    on    Acceptances    under 
Letters  of  Creiiit $ 

As  the  foreign  correspondent  will  have  honored  his  accept- 
ance for  the  account  of  his  American  correspondent  and  charged 
the  latter's  account,  the  American  banker  will  pass  a  third  entry 
to  clear  his  liability  account  and  credit  the  foreign  correspondent 
for  payment  of  the  draft,  as  follows: 

Acceptances  by  Foreign  Correspondents $ 

Foreign  Correspondents'  Commercial  Letters  of 
Credit  (Nostro)  Account $ 

Unpresented  Foreign  Drafts.  This  hability  account  is  vir- 
tually a  suspense  accoimt.  Assume  that  a  foreign  correspondent 
draws  dollar  drafts  on  an  American  bank  and  advises  the  latter  of 
the  fact.  The  draft  has  not  yet  been  presented  for  payment,  yet 
the  liability  exists  in  a  contingent  form  and  there  must  be  funds 


FOREIGN  EXCHANGE  ACCOUNTING  97 

set  aside  to  meet  this  demand  upon  the  bank  when  the  draft  is  pre- 
sented .   Accordingly  the  following  provision  is  made  on  the  books : 

Foreign  Correspondent's  Dollar  Account $...... 

Unpresented  Foreign  Drafts $ 


This  sets  up  the  liability  and  also  in  effect  reserves  a  correspond- 
ing amount  of  the  cash  assets  of  the  bank  to  meet  the  demand  for 
payment  of  these  unpresented  drafts. 

Dollar  Drafts  Drawn.  This  is  a  contingent  liability  account, 
set  up  when  dollar  drafts  on  foreign  correspondents  are  sold  by  the 
American  banker.  Depending  upon  whether  the  dollar  drafts 
were  sold  against  cash  or  credit,  the  entry  will  be: 

Cash  or  Accounts  Receivable  (Dollar  Accounts) $ 

Dollar  Drafts  Drawn $ 


When  advice  is  received  that  payment  has  been  effected,  the 
liability  account  is  cleared. 

Travelers^  Letters  of  Credit  and  Checks.  In  order  to  eliminate 
the  necessity  of  carrying  large  sums  of  money  when  traveling 
abroad,  most  banks  and  foreign  exchange  bankers  issue  travelers' 
letters  of  credit  (T.L.C.).  These  may  be  issued  either  against 
cash  payment  by  the  customer  or  against  the  customer's  lia- 
bility, as  with  the  commercial  letter  of  credit.  If  the  customer 
pays  cash  for  his  T.L.C.  the  banker's  entry  would  be: 

Cash $ 

Deposits  against  T.  L.  C.  Issued $ 

To  record  liability  due  to  the  receipt  of  cash 
from  the  sale  of  a  travelers'  letter  of  credit. 

As  long  as  the  letter  of  credit  is  not  fully  used  by  the  traveler^ 
the  obligation  of  the  bank  will  stand.  These  letters  of  credit 
will  be  honored  by  the  foreign  correspondents  of  the  banker  in 
cities  and  will  be  charged  against  his  account.  The  traveler 
presents  the  letter  of  credit  at  the  Paris  correspondent's  office, 
which  issues  francs  in  return  and  charges  the  American  banker 
who  issued  the  letter  of  credit.     When  the  French  banker  advises 


98  ACCOUNTING— THEORY  AND  PRACTICE 

his  American  correspondent  of  the  draft,  the  latter  passes  an 
entry  reducing  his  obHgation  under  travelers'  letters  of  credit 
issued  and  crediting  the  foreign  correspondent  with  the  payment 
at  the  rate  of  exchange  current  on  the  date  of  presentation  of  the 
draft. 

Deposits  against  Travelers'  Letters  of  Credit  Issued ....  $ 

French  Correspondent's  T.  L.  C.  (Nostro)  Ac- 
count    $ 

To  credit  foreign  correspondent  with  payment 
of  draft  presented  under  T.  L.  C.  and  to  re- 
duce liability  due  to  issue  of  letter  of  credit. 

If  the  customer  is  well  known  to  the  American  banker,  he  may 
require  no  security,  but  may  issue  the  travelers'  letter  of  credit 
on  the  same  basis  as  that  of  a  commercial  letter  of  credit.  In  this 
case  the  entries  are: 

Customers'  Liability  under  Travelers' Letters  of  Credit  $ 

Travelers'  Letters  of  Credit  Issued $ 

To  record  contingent  claim  against  customer 
to  offset  contingent  liability  arising  out  of 
issue  of  travelers'  letter  of  credit. 

The  contingent  character  of  both  sides  of  this  entry  may  change 
at  any  time  to  that  of  a  real  asset  or  a  real  liability. 

Similar  to  the  travelers'  letters  of  credit  are  the  travelers' 
checks  issued  by  the  larger  banks,  made  payable  to  the  traveler 
and  forming  a  real  obHgation  of  the  issuing  bank.  The 
entries  are  simpler  since  these  checks  are  issued  only  against 
cash. 

Cash $ 

Travelers'  Checks  Outstanding $ 

To  record  sale  of  travelers'  checks  and  the  obli- 
gation arising  out  of  their  issue. 

As  these  checks  are  presented  abroad,  honored  by  the  foreign 
bank,  and  their  payment  advised  to  the  issuing  American  bank, 
the  entries  are: 


FOREIGN  EXCHANGE  ACCOUNTING 


99 


Travelers'  Checks  Outstanding $ . 

Foreign  Correspondent's  T.  L.  C.  (Nostro)  Ac- 
count   

To  reduce  bank's  liability  and  credit  foreign 
correspondent  for  honoring  travelers'  checks. 


Profit  and  Loss  Accounts 

Most  of  the  profit  and  loss  accounts  given  in  the  schedule  are 
self-evident  and  require  no  explanation.  Postings  to  the  various 
accounts  are  made  as  a  rule  by  summary  entries  at  the  end  of  the 
day,  week,  or  whatever  period  is  used.  Such  accounts  as  Guilder, 
Franc,  Mark,  Sterling,  etc.,  represent  profits  or  losses  made  in 
those  foreign  currencies  on  exchange  sales  and  purchases. 

The  question  may  arise,  however,  how  foreign  exchange  prof- 
its actually  appear  on  the  books  and  how  track  is  kept  of  the 
profits  or  losses  occurring  through  the  year.  In  the  section 
devoted  to  the  foreign  exchange  trader  it  was  shown  how  esti- 
mates of  profits  are  made  daily  and  current  statistical  records 
kept,  showing  the  approximate  profits  arising  from  differences  of 
rates  between  exchange  sold  and  exchange  bought.  The  actual 
profit  or  loss,  however,  appears  in  the  nostro  accounts  kept  with 
the  various  foreign  correspondents.  The  following  theoretical 
entries  will  show  how  the  profits  might  appear  in  an  account : 


Nostro  Ledger — London  Correspondent 


1/   2/21  We  buy  ..  .  .      £10,000     140,000.00 
1/  6/21     "      "    ....  5,000        20,050.00 

Interest ....  5 


£15,005     $60,050.00 
2/28/21  Nostro  account  (Profit)  110.00 


$60,160.00 


2/  2/21  We  sell £  5,000     $20,160.00 

2/16/21     "     " 10,000       40,000.00 

Cables    and 

charges. . .  5 


£15,005 


$60,160.00 


Profit  on  Sterling 


2/28/21  London      Correspond- 
ent's Account 


$110.00 


100  ACCOUNTING— THEORY  AND  PRACTICE 

Where  joint  accounts  are  kept,  the  profits  are  divided  in 
accordance  with  the  agreement,  crediting  the  foreign  corre- 
spondent's account  with  his  share  of  the  profit.  The  complete 
entry  under  such  conditions  might  be: 

Foreign  Exchange  Joint  Account $1,500.00 

Foreign  Correspondent's  Joint  Account $    500.00 

Profit  and  Loss  (Sterling)  Account 1,000.00 

To  close  Foreign  Exchange  joint  account 
and  distribute  profits  according  to  agree- 
ment. 


CHAPTER  IV 

SAVINGS  BANK   ACCOUNTING 
By  Roy  B.  Kester 

Two  Types  of  Savings  Banks 

The  distinction  between  a  savings  bank  and  a  commercial 
bank  is  that  a  savings  bank  receives  money  not  subject  to  check 
but  payable  only  on  the  presentation  of  the  pass-book  and  due 
notice,  whereas  a  commercial  bank  discounts  commercial  paper, 
handles  checking  accounts,  and  lends  on  negotiable  paper;  in 
short,  does  a  "^commercial"  business.  However,  the  inclusion 
of  the  word  *' savings"  in  the  title  of  a  bank  does  not  imply 
that  it  is  purely  a  savings  bank  and  nothing  else.  The  actual 
test  of  what  a  savings  bank  is  depends  on  the  functions  performed 
and  not  the  name. 

Of  savings  banks  proper  there  are  two  types:  (i)  the  mutual 
or  trustee  savings  bank;  and  (2)  the  stock  savings  bank.  In 
point  of  numbers,  there  are  more  stock  than  mutual  savings 
banks ;  nevertheless  this  discussion  is  centered  on  the  .mutual 
type,  because  institutions  of  this  class  do  a  far  larger  volume  of 
business.  Most  of  the  features  of  organization,  methods  of 
operating  and  procedure  are  equally  applicable  to  both,  the  chief 
differences  being  those  of  ownership  and  profits  distribution. 

Characteristic  Features  of  the  Mutual  Savings  Bank 

The  following  are  the  characteristic  features  of  the  mutual 
savings  bank : 

I.  The  depositors  realize  all  the  profits  and  bear  all  the 
losses.  All  the  deposits,  except  a  certain  necessary  reserve,  are 
invested  in  securities  yielding  as  high  a  rate  as  is  consistent  with 
absolute  safety,  and  all  the  income,  less  a  guaranty  fund  for 


102  ACCOUNTING— THEORY  AND  PRACTICE 

safety  (like  the  ordinary  surplus)  and  the  necessary  expenses, 
is  paid  to  the  depositors .  Though  generally  called  ' '  interest, '  *  the 
payments  to  depositors  are  actually  dividends.  The  net  worth 
of  the  business  belongs  to  the  depositors  and  every  accretion  to  it 
as  well  as  every  loss  is  their  profit  or  loss.  This  fact  accounts  for 
the  term  "mutual,"  the  depositors  combining  their  savings, 
generally  too  small  for  individual  investment,  for  their  mutual 
advantage.  There  is  no  profit  for  anyone  except  the  depositors 
themselves.  The  trustees  of  the  bank  hold  a  position  of  re- 
sponsibility for  which  they  receive  no  remuneration  and  the 
reward  of  which  is  the  distinction  of  serving  the  community. 
The  officers  of  the  bank  as  well  as  the  clerks  are  the  salaried 
representatives  of  the  depositors. 

2.  A  second  characteristic  feature  of  the  mutual  savings 
bank  is  that  its  investments  are  subject  to  legal  restrictions.  Its 
depositors  are  almost  always  persons  of  small  means,  and  as  their 
savings  deposits  constitute  the  capital  of  the  bank,  they  are  not 
safeguarded  by  the  ordinary  capital  stock  and  surplus  as  are  the 
depositors  in  commercial  banks. 

3.  Another  characteristic  feature  of  the  mutual  type  of  bank 
is  the  permanent  character  of  the  position  of  its  trustees.  Money 
cannot  usually  gain  this  position.  The  trustee  must  be  elected 
by  the  board  of  trustees  itself.  Moreover,  he  is  not  deprived  of 
his  position  unless  he  dies,  resigns,  becomes  bankrupt,  or,  in  New 
York  State,  fails  to  attend  meetings  or  is  expelled  by  a  three- 
quarter  vote  of  the  board. 

A  weakness  of  the  mutual  type  of  bank  lies  in  the  fact  that  if 
through  mismanagement  it  fails,  the  loss,  unless  covered  by  the 
guaranty  fund,  falls  wholly  upon  the  depositors,  as  they  are  the 
owners  of  the  bank. 

The  Stock  Savings  Banks 

The  stock  savings  institution,  so  far  as  concerns  its  organiza- 
tion, resembles  the  modern  corporation.  Stock  is  sold,  the 
stockholders  elect  the  directors,  the  directors  the  officers,  and 


SAVINGS  BANK  ACCOUNTING  IO3 

business  begins.  Profits  for  the  stockholders  are  made  by  re- 
ceiving an  income  from  investments  and  deposits  in  other  banks 
greater  than  the  interest  paid  to  depositors. 

The  profits  are  paid  to  the  stockholders  in  the  form  of  divi- 
dends after  certain  legal  requirements  as  to  accumulating  a  sur- 
plus have  been  satisfied.  The  rate  of  interest  paid  the  depositors 
is  a  matter  of  contract,  the  bank  paying  as  low  a  rate  as  is  con- 
sistent with  securing  deposits.  The  depositors  are  paid  only  the 
stipulated  rate  of  interest,  no  matter  how  great  the  profits.  Con- 
versely, they  receive  no  less  whether  the  bank  suffers  a  loss  or 
not.  On  the  other  hand,  the  depositors  of  the  mutual  savings 
bank  are  entitled  to  more  than  the  ordinary  rate  of  interest  if 
profits  permit  after  all  expenses  have  been  paid  and  the  legal 
requirement  of  a  guarantee  fund  has  been  fulfilled ;  but  as  noted 
above  they  also  suffer  whatever  loss  the  institution  sustains. 

To  sum  up,  the  stock  savings  bank,  like  the  ordinary  com- 
mercial bank,  is  organized  for  gain,  whereas  the  mutual  savings 
bank  makes  no  profits  for  itself,  but  is  merely  the  agent  or  trustee 
for  the  whole  body  of  depositors  to  whom  it  turns  over  its  financial 
gains. 

A  feature  which  both  types  of  savings  banks  have  in  common 
is  the  right  to  demand  from  depositors  from  10  days'  to  4  months' 
notice  of  withdrawal  for  sums  above  a  certain  amount.  This 
notice  is  necessary  because  mortgage  loans  constitute  a  great 
part  of  the  savings  bank's  investments,  which  are  usually  of 
some  years'  duration  and  on  which  money  cannot  be  quickly 
realized. 

The  Organization  of  a  Mutual  Savings  Bank 

Though  the  trustees  are  the  organizers  of  a  mutual  savings 
bank  they  receive  little  or  nothing  for  their  services  and  risk. 
The  laws  of  practically  all  states  deny  the  trustee  the  privilege  of 
borrowing  from  the  bank;  he  gets  no  fee — or  only  a  small  one — 
for  his  attendance  at  the  board  meetings;  and  any  desirable 
salaried  office  in  the  bank  is  open  to  him  only  after  the  bank  is 


I04  ACCOUNTING— THEORY  AND  PRACTICE 

thoroughly  established,  when  there  is  only  a  slight  chance  of  his 
securing  such  a  position;  finally,  there  is  no  bank  stock  to  increase 
in  value  and  thus  remunerate  the  organizers  who  own  this  stock. 

A  natural  query  is:  If  the  trustees  receive  nothing  for  their 
services  why  do  they  organize  a  mutual  bank?  Their  motives 
today  are  rarely  wholly  philanthropic  as  used  to  be  the  case  in 
the  earlier  days  of  mutual  savings  banks.  There  are  two  main  ■ 
incentives  to  organization :  The  first  is  the  desire  of  an  established 
commercial  bank  to  secure  as  a  deposit  the  reserve  fund  that  a 
savings  bank  must  by  law  keep  available  for  emergencies,  either  in 
its  own  vaults  or  on  deposit  in  another  bank.  As  the  commercial 
bank  pays  the  savings  bank  about  2%  interest  on  this  reserve 
and  earns  5%  or  6%  on  it,  the  reserve  of  a  savings  bank  of  any 
size  is  a  profitable  deposit  for  a  commercial  bank.  The  second 
incentive  is  often  the  desire  on  the  part  of  an  attorney  to  serve  in 
the  capacity  of  a  trustee  of  a  savings  bank.  Such  a  position  gives 
him  prestige,  and  enables  him  to  increase  the  number  of  his  cHen- 
tele  through  his  intimate  association  with  this  public  institution. 
And  last,  but  most  important,  the  bank  may  prove  to  be  a  chent 
requiring  much  legal  work,  the  annual  fee  for  which  may  run 
into  the  thousands. 

A  mutual  bank  must  have  a  certain  number  of  trustees  rang- 
ing from  3  in  Colorado  and  Minnesota  to  30  in  New  York,  two- 
thirds  of  whom  must  live  in  the  county  where  the  bank  is  situated. 
As  bank  trustees  must  be  of  the  highest  character,  the  men  sought 
are  the  leading  citizens  in  the  community,  whose  names  inspire 
confidence.  The  chief  inducement  to  be  offered  a  prospective 
trustee  is  the  honor  of  the  position,  for  as  the  institution  grows, 
the  prestige  of  the  trusteeship  grows  likewise.  In  return,  he 
must  give  the  necessary  time  and  attention  to  the  general  super- 
vision of  the  bank;  and  in  some  states — as  in  New  York — the 
trustees  are  required  to  pay  the  running  expenses  until  the 
institution  earns  sufficient  profits  to  repay  this  advance. 

After  the  required  number  of  trustees  has  been  secured, 
notice  of  the  proposed  organization  and  like  details  must  be 


SAVINGS  BANK  ACCOUNTING  I05 

published  at  least  once  a  week  for  4  weeks  in  the  most  prominent 
local  newspaper,  before  filing  the  certificate  of  organization  and 
applying  for  a  state  charter;  also,  any  other  savings  bank  in  the 
same  locality  must  be  given  notice  at  least  15  days  before  the 
filing  of  the  certificate.  This  certificate  states  the  town  or  city 
ward  where  the  bank  is  to  be  located,  its  name,  the  residence  and 
occupation  of  the  organizers,  with  their  declaration  to  discharge 
faithfully  the  duties  of  the  office.  The  document  is  filed  in  the 
county  clerk's  office  and  a  duplicate  copy  is  sent  to  the  banking 
department  of  the  state. 

The  official  in  charge  of  the  banking  affairs  of  the  state  (in 
New  York  the  Superintendent  of  Banks,  in  Massachusetts  and 
Pennsylvania  the  Bank  Commissioner)  investigates  whether  the 
bank  will  be  of  service  to  the  locality  and  be  successful,  and 
whether  the  trustees  are  men  of  good  local  standing.  If  the  in- 
vestigations of  the  superintendent  or  commissioner  prove  satis- 
factory and  the  trustees  give  a  bond  to  pay  all  expenses  and  in- 
terest to  depositors  until  the  bank  pays  its  way,  and  if  there  is  no 
opposition  on  the  part  of  a  similar  institution  in  the  same  locality, 
the  bank  charter  is  usually  issued.  A  meeting  of  the  trustees  is 
then  held,  committees  are  appointed,  officers  elected,  by-laws 
adopted,  and,  after  the  necessary  quarters  have  been  secured,  the 
bank  is  opened. 

Legal  Liabilities  of  Trustees 

Since  the  trustee  has  no  remuneration,  he  incurs  no  liability 
unless  illegal  investments  are  made  with  the  bank's  deposits,  or 
unless  gross  mismanagement  can  be  proved.  If  some  investments 
are  lost,  the  trustee  is  not  hable  provided  he  used  the  care  that 
any  prudent  man  would  ordinarily  use  in  his  own  business.  No 
man  has  perfect  foresight  and  judgment  and  such  a  loss  would 
be  part  of  the  regular  business  risk.  If,  however,  the  trustee  is 
grossly  negligent  and  inattentive  to  his  trust  he  is  personally 
liable  for  fraud  and  loss.  Embezzlement  by  one  of  the  officers 
unless  very  cleverly  concealed  would  probably  make  the  trustees 


Io6  ACCOUNTING— THEORY  AND  PRACTICE 

liable  because  all  states  require  a  periodical  examination  of  the 
bank's  affairs  and  books  by  trustees'  committees.  Finally,  the 
law's  intent  is  to  prevent  officers  in  savings  banks  from  serving 
at  the  same  time  in  a  similar  capacity  with  banks  of  discount,  for 
the  reason  that  such  an  aUiancehas  too  often  led  to  the  subordina- 
tion of  the  savings  bank's  interests  to  those  of  the  commercial  bank. 
For  the  same  reason  most  states  today  forbid  a  majority  of 
the  trustees  of  a  savings  bank  to  be  directors  of  a  commercial 
bank  and  also  forbid  trustees  who  are  directors  of  a  bank  of  dis- 
count to  vote  on  the  matter  of  selecting  their  bank  as  depository 
for  surplus  savings  bank  funds. 

The  Management — Executive 

The  executive  work  of  the  bank  falls  upon  the  officers  and  a 
number  of  committees,  depending  upon  the  size  of  the  institu- 
tion. The  principal  officials  are  the  president,  the  vice-presi- 
dents, secretary,  treasurer,  and  in  a  few  banks  the  comptroller. 
The  committees  of  a  large  savings  institution  include  a  finance 
committee,  which  superintends  the  sale  and  purchase  of  securi- 
ties; an  examining  or  auditing  committee,  which  analyzes  and 
verifies  cash,  vouchers,  and  expenses,  and  the  assets  and  habilities 
in  general;  an  attending  committee,  which  supervises  the  actual 
operation  of  the  institution  through  the  attendance  about  once  a 
week  of  one  of  its  members;  an  executive  committee,  which  may 
have  the  same  general  duties  as  the  attending  committee  but 
which  makes  in  addition  periodical  examination  of  the  bank's 
cash  balance  and  deposits;  and  a  nominating  committee  with 
oversight  over  all  the  appointments  of  trustees  and  officers. 

A  third  division  of  the  management  comprises  the  clerical 
workers.  At  their  head  is  the  cashier,  auditor,  or  chief  clerk,  who 
is  the  administrative  head  of  the  accounting  system.  Beneath 
him  are  the  head  bookkeeper,  tellers,  ledger  clerks,  assistants,  filing 
clerks,  and  so  on  down  to  janitor,  guards,  and  night  watchman. 

The  accompanying  chart  (Form  i)  shows  a  typical  organiza- 
tion of  a  mutual  savings  bank. 


SAVINGS  BANK  ACCOUNTING 


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I08  ACCOUNTING— THEORY  AND  PRACTICE 

The  Bank's  Investments  and  Stock-in-Trade 

A  mutual  bank's  stock-in-trade  is  the  savings  received  from 
depositors;  the  stock-in-trade  of  a  stock  savings  bank  is  the  simi 
realized  from  the  sale  of  its  shares  of  stock  plus  the  deposits 
of  its  clientele.  In  the  case  of  either  type  of  bank  this  money- 
received  is  invested  in  securities  and  mortgages  on  property. 
These  investments  are  usually  under  strict  legal  regulation,  the 
provisions  varying  somewhat  in  different  states,  and  the  interest 
received  from  them  is  the  bank's  main  source  of  income.  The 
difference  between  the  interest  and  the  necessary  expenses  of 
conducting  the  bank  is  the  net  profit. 

In  New  York  State  the  legal  investments  of  a  savings  bank 
are: 

1.  Bonds  of  the  United  States  or  District  of  Columbia. 

2.  Bonds  of  New  York  State. 

3.  Bonds  of  other  states  with  state  guaranties,  on  which 

there  has  been  no  protracted  default. 

4.  Any  security  of  a  New  York  State  subdivision  guaranteed 

by  the  district. 

5.  Securities  of  other  United  States  cities  of  a  certain  age, 

size,  and  favorable  record. 

6.  Bonds  and  mortgages  on  New  York  State  unencumbered 

real  property  to  a  value  of  60%  of  improved  and  40% 
on  unimproved  land,  qualified  by  minor  requirements 
and  reinforced  by  certain  regulations. 

7.  Well-diversified  first  mortgage  bonds  of  railroad  corpora- 

tions with  good  records  and  capacity.  Only  25%  of 
the  bank's  assets  may  be  invested  in  bonds  of  this  class. 

8.  Demand  promissory  notes  secured  by  pledge  and  assign- 

ment of  certain  securities. 

9.  Bankers'  acceptances. 

10.  Certain  classes  of  real  estate,  chiefly  that  which  the  bank 
needs  for  business  and  that  taken  in  satisfaction  of  a 
debt. 


SAVINGS  BANK  ACCOUNTING  IO9 

Distinctive  Features  of  Savings  Bank  Accounting 

Before  describing  the  savings  bank's  accounts  and  records 
a  brief  statement  will  be  made  of  several  features  more  or  less 
peculiar  to  savings  bank  accounting.     They  are  as  follows : 

1 .  The  daily  statement  of  the  proof  of  the  depositors  ledgers. 
This  statement  consists  of  a  proof  or  trial  balance  of  those  ac- 
counts affected  during  the  day.  A  complete  trial  balance  of  all 
accounts  is  taken  every  6  months.  The  main  reason  for  this 
daily  proof  of  the  depositors  ledger  is  to  detect  errors  as  soon  as 
made.  If  this  proof  were  not  made  daily,  the  task  of  finding  an 
error  at  the  end  of  6  months  would  in  a  large  bank  be  practically 
impossible. 

2.  The  continuous  balancing  of  the  depositors'  accounts. 
The  depositors  ledger  is  kept  in  a  way  to  show  all  account  bal- 
ances. The  purpose  of  this  feature  is  to  prevent  the  payment  of 
overdrafts  and  to  save  time  when  paying  out  withdrawals. 

3.  The  valuation  of  securities  at  balance  sheet  time.  This 
matter  is  important  because  on  the  valuation  depends  the  amount 
of  surplus  and  often  the  dividends  that  may  be  paid.  To  insure 
uniform  accounting  and  guard  against  inflation  of  assets  the 
Superintendent  of  Banks  of  the  State  of  New  York  issues  a  list 
of  the  prices  at  which  individual  securities  may  be  valued ;  these 
lists,  determined  by  the  sales  for  the  6  months  preceding  and 
general  business  conditions,  are  sent  out  on  June  i ,  and  December 
I.     Needless  to  say,  the  valuation  is  conservative. 

4.  The  important  part  played  by  amortization  principles 
due  to  the  bank's  heavy  investments  in  bonds. 

5.  The  prevention  and  detection  of  errors  and  defalcations. 

The  Departmental  Working  Organization 

The  accounting  system  of  a  savings  bank  is  handled  by  a 
working  organization,  particularly  in  the  larger  banks,  which  is 
divided  into  the  following  departments: 

1.  New  accounts 

2.  Paying 


no  ACCOUNTING— THEORY  AND  PRACTICE 

3.  Receiving 

4.  General  and  executive 

The  records  kept  in  each  department  will  be  discussed  in  the 
order  given  above. 

New  Accounts  Department 

The  new  accounts  teller  keeps  what  is  called  the  "new  accounts 
teller's  summary"  for  the  purpose  of  recording  and  summariz- 
ing his  daily  activities.  On  one  side  is  a  column  charging  him 
with  the  amount  he  has  on  hand  at  the  beginning  of  the  day's 
business  and  how  much  he  takes  in,  that  is,  the  amount  of  cash 
and  checks  received  in  opening  accounts  and  the  amount  of  new 
accounts  opened  by  transferring  from  old  accounts.  On  the 
other  side  is  a  column  crediting  him  with  the  cash  he  turns  over 
to  the  paying  teller,  the  amount  of  checks  he  receives,  and  the 
amount  of  new  accounts  opened  by  transfer.  As  the  checks 
received  and  new  accounts  opened  have  been  both  debited  and 
credited,  the  balance  shows  how  much  cash  should  be  on  hand, 
checks  not  being  counted  as  cash.  There  are  separate  columns 
at  the  right  for  listing  the  checks  in  detail  (relatively  few  checks 
find  their  way  into  savings  banks)  and  the  kinds  of  cash — gold, 
silver,  and  bills.  The  daily  summaries  of  all  tellers  go  to  the 
clerk  in  charge  of  the  petty  cash  book.  The  reasons  for  this  will 
be  explained  later. 

The  Paying  Department 

The  withdrawal  receipts  or  drafts,  by  means  of  which  a  de- 
positor withdraws  his  funds,  are  made  out  by  a  clerk  in  the  pay- 
ing teller's  department  and  given  to  the  depositor  for  signature. 
The  depositor  receives  his  money  from  the  paying  teller  only 
after  his  signature  and  account  balance  have  been  verified  and 
the  amount  of  the  draft  has  been  entered  on  a  journal  sheet, 
which  is  ruled  to  show  the  account  number,  name,  amount  of 
drafts,  and  previous  and  present  balances.  There  is  one  sheet  for 
each  depositors  ledger. 


SAVINGS  BANK  ACCOUNTING  III 

The  withdrawal  receipts  before  being  used  are  numbered 
every  morning  consecutively  from  i  up  and  are  entered  in  the 
same  order  on  the  journal  sheet  so  that  a  mistake  can  be  quickly 
traced.  At  the  day's  close  the  journal  sheets  are  summarized  on 
a  special  columnar  form.  The  total  of  the  journal  sheets  and  the 
total  of  the  summary  form  or  paying  teller's  proof  should  agree 
with  the  totals  of  the  day's  withdrawal  receipts. 

The  Receiving  Department 

The  procedure  in  the  receiving  department  is  much  the  same 
as  in  the  paying  department,  the  deposit  tickets  taking  the  place 
of  the  withdrawal  receipts.  The  tickets  are  numbered  in  advance 
for  each  day,  and  give  such  details  as  the  date,  account  number, 
name,  and  amount  of  the  deposit.  They  are  entered  consecu- 
tively in  a  journal  sheet,  there  being  one  sheet  for  each  deposi- 
tors ledger.  After  that  the  sheets  are  summarized  on  what  is 
called  the  "daily  proof"  or  "deposit  total  sheet." 

At  the  close  of  the  day  the  proof  sheets  of  both  paying  and 
receiving  tellers  are  sent  to  the  head  bookkeeper  who  posts  their 
totals  in  a  depositors  control  book  or  ledger  the  pages  of  which 
are  ruled  with  vertical  columns  headed  with  the  numbers  of  the 
various  depositors  ledgers  and  horizontal  lines  for  the  days  of 
the  month.  The  two  summaries  are  the  basis  for  the  entries  in 
the  cash  book  and  the  general  ledger. 

The  white  drafts  or  withdrawal  tickets  and  the  yellow  deposit 
tickets,  which  at  first  were  arranged  by  the  day's  transaction 
number  for  entry  on  the  journal  sheet,  are  now  rearranged  by 
account  numbers  for  entry  in  the  depositors  ledgers.  Each  deposit 
and  draft  is  posted  to  the  proper  ledger  card,  in  the  four  columns 
of  which  are  entered  the  date,  the  amount  of  the  deposit  or  with- 
drawal, and  the  balance.  On  the  completion  of  the  ledger  entry 
the  new  balance  after  each  deposit  or  draft  is  listed  on  a  two- 
column  sheet  known  as  a  "ledger  slip,"  one  column  being  for 
deposits  and  the  other  for  drafts.  The  deposit  and  draft 
journal  sheets,  already  described,  before  .being  added  for  the 


112 


ACCOUNTING— THEORY  AND  PRACTICE 


daily  summaries  are  also  sent  to  the  ledger  section  where  the  old 
and  new  balances  from  the  ledger  card  are  posted  to  the  last  two 
columns  on  the  journal  sheets.  Therefore,  at  the  close  of  the  day 
the  totals  of  the  two-column  ledger  slip,  must  equal  the  totals  of 
the  last  two  columns  of  the  deposit  and  draft  journal  sheets. 


Draft 


Deposit 


Draft  Clerk 

Teller's 
Assistant 

1 

Test  Clerk 

Receiving 
Teller 

1 

Journal  Clerk 

Entry  Teller 

1 

Listing  Clerk 

Journal  Clerk 

"-^ — -...^^                   ___,.. — ■ — 

Depositors 
Ledger  Clerk 

II 

Journal 
Total  Clerk 

II 

Filed 

Form  2.     Chart  Shomng  Route  of  Drajt  and  Deposit  in  Savings  Bank 


The  chart  above  (Form  2)  shows  the  steps  in  the  life  of  the 
ordinary  draft  and  deposit  and  the  personnel  required  to  handle 
them. 

Note  that  a  draft  does  not  go  to  the  paying  teller.  The 
journal  sheet,  written  up  from  a  draft  or  deposit  ticket,  goes 
from  the  journal  clerk  to  the  journal  total  clerk  and  then  to  the 


SAVINGS  BANK  ACCOUNTING  H3 

head  bookkeeper,  who  uses  it  as  the  basis  for  entries  to  the 
controUing  ledger  of  the  depositors  ledger  cards. 

In  most  banks  the  receiving  systems  differ  little.  They 
approximate  the  following  procedure :  The  first  clerk  receives  the 
pass-book,  makes  out  a  ticket,  and  enters  the  amount  in  the 
book;  the  receiving  teller  receives  and  counts  the  cash  and  enters 
on  his  memorandum  sheet  the  amount  entered  in  the  pass-book 
with  the  book's  number;  a  third  clerk  then  lists  the  deposit 
tickets  whose  totals  must  prove  with  the  teller's  sheet  total. 

The  paying  systems  follow  the  same  general  plan:  One  clerk 
makes  out  the  withdrawal  draft  slip  and  enters  the  amount  in 
the  customer's  pass-book,  another  clerk  keeps  a  record  of  the 
amounts  entered  in  the  pass-books,  a  third  attends  to  the  cash 
and  counts  it  carefully.  Thus,  except  in  a  small  bank  where  one 
clerk  may  perform  several  functions,  the  work  of  one  man  checks 
that  of  another  and  fraud  and  the  more  common  errors  are 
almost  eliminated. 

In  some  banks  a  record  is  made  on  the  ledger  cards  by  the 
bookkeeper,  who  often  makes  the  pass-book  entries  as  well. 
This  doubtless  involves  longer  waiting  for  the  customer  than 
would  be  the  case  if  the  entries  to  the  ledger  cards  were  made  at 
the  close  of  banking  hours.  Again  in  a  small  bank  it  is  often 
feasible  to  use  the  ledger  card  as  a  signature  card,  thus  eliminat- 
ing the  necessity  of  a  separate  signature  file.  In  a  large  bank 
the  ledgers  take  up  too  much  room  to  permit  them  to  be  handled 
by  the  tellers  for  quick  reference. 

The  General  and  Executive  Department 

The  work  of  the  general  and  executive  department  is  a  little 
more  varied  than  that  of  the  others.  The  main  functions  of  the 
department  are  those  of:  (i)  the  executive  staff,  (2)  the  payment 
of  petty  disbursements,  (3)  mortgage  loans,  and  (4)  stock  and 
bond  investment.     These  matters  will  be  considered  in  turn. 

Little  need  be  said  about  the  first  two  functions.  The  execu- 
tive staff,  as  shown  by  the  chart  (see  Form  i),  is  headed  by  the 


114  ACCOUNTING— THEORY  AND  PRACTICE 

president  and  its  work  consists  in  carrying  out  the  general  policy 
of  the  bank  as  laid  down  by  the  trustees,  whether  with  regard  to 
deposits  or  investments.  As  regards  petty  disbursements  these 
are  made  by  the  teller  in  the  bond  and  mortgage  department 
merely  because  he  is  generally  less  occupied  than  the  paying  and 
receiving  tellers. 

As  mortgage  loans  on  real  estate  constitute  the  larger  part  of  a 
savings  bank's  investments,  the  principal  work  of  the  executive 
department  is  with  bonds  and  mortgages.  Certain  precautions 
are  necessary  to  protect  the  bank  in  loans  on  real  estate.  The 
first  essential  is  to  determine  the  value  of  the  property.  Loans 
can  be  made  to  the  extent  of  only  60%  on  improved  real  property 
and  40%  on  unimproved.  To  determine  this  value  is  very  diffi- 
cult, it  depends  chiefly  on  the  income  return.  Property  values 
are  also  determined  to  some  extent  from  sales  of  similar  pieces  of 
property  in  the  neighborhood.  Finally,  economic  causes,  such  as 
the  movement  or  trend  of  population,  the  appearance  or  disap- 
pearance of  industries  in  the  locality,  and  the  opening  of  better 
means  of  transit,  must  be  considered  in  appraising  property. 

The  name  of  "stock  and  bond  investment"  for  the  third 
function  of  the  executive  department  is  really  a  misnomer. 
Actually  savings  banks  cannot  legally  invest  their  deposits  in 
stocks  with  one  exception  in  New  York  State — the  corporate 
stock  of  the  City  of  New  York — which,  however,  is  essentially  a 
bond  issue. 

Subsidiary  Records — The  Bond  and  Mortgage  Record 

The  three  principal  subsidiary  records  of  a  savings  bank  are: 
(i)  the  depositors'  records,  (2)  the  bond  and  mortgage  records, 
and  (3)  the  stock  and  bond  records.  The  first  has  already  been 
discussed  in  connection  with  the  receiving  and  paying  depart- 
ments. It  remains  to  describe  the  other  two.  Systems  differ 
in  different  banks  but  those  outlined  may  be  regarded  as  typical. 

It  is  unnecessary  to  discuss  the  procedure  followed  by  the 
executive  department  in  granting  a  loan  on  a  mortgage.    Assum- 


SAVINGS  BANK  ACCOUNTING  II5 

big  that  a  loan  has  been  granted  on  real  estate,  the  first  account- 
ing step  is  to  record  it  in  the  bond  and  mortgage  ledger.  This 
ledger,  like  the  depositors  ledger,  is  in  card  form,  is  indexed  by 
the  number  of  the  mortgage,  and  each  card  contains  information 
as  to  the  location  of  the  property,  the  insurance,  principal,  and 
interest  payments. 

Three  minor  files  are  also  kept  for  each  mortgage:  The  first 
is  indexed  by  name,  the  second  by  street,  and  in  the  third  is  a 
record  of  the  expiration  dates  of  insurance  policies.  The  need 
for  the  first  file  is  self-explanatory;  the  second  is  necessary  be- 
cause queries  often  come  to  a  large  savings  bank  as  to  whether 
or  not  there  is  a  mortgage  on  property  situated  in  such  and  such 
a  street,  the  owner  of  which  is  unknown  to  the  inquirers;  and 
the  third  file  shows  the  mortgage  number,  owner's  name,  loca- 
tion of  the  premises,  insurance  company,  policy  number,  and 
amount. 

Two  weeks  before  the  expiration  date  of  the  insurance  policy 
a  notice  is  sent  to  the  owner  stating  that  if  the  bank  does  not 
receive  formal  notification  of  renewal  before  noon  of  the  day  of 
expiration,  the  bank  will  renew  the  policy  in  one  of  its  companies 
and  charge  the  premium  amount  to  the  mortgagor.  Many 
banks  stipulate  that  insurance  policies  must  be  taken  out  by  the 
borrower  in  designated  companies  only — a  fair  provision  if  the 
list  of  designated  companies  is  sufiiciently  large.  The  stipulation 
must  be  acknowledged  by  the  mortgagor  before  the  loan  is  closed, 
for  otherwise  the  law  regards  the  bank  as  having  waived  this 
right. 

For  the  sake  of  uniformity  in  the  bank's  records  interest  pay- 
ments on  mortgages  are  due  in  June  and  December.  Two  weeks 
before  these  semiannual  dates  notices  are  sent  to  the  mortgagors. 
When  the  interest  is  paid,  a  receipt  is  given,  the  stub  being  kept 
as  a  record  of  the  payment.  If  cash  is  paid,  the  date  is  stamped 
on  the  receipt  and  stub;  if  a  check  is  given,  a  stamp  with  the  word 
"theck"  is  used  below  the  date.  On  the  receipt,  the  amount  of 
the  interest,  the  bond  «and  mortgage  number,  and  the  name  and 


Il6  ACCOUNTING— THEORY  AND  PRACTICE 

address  of  the  mortgagor  are  printed  by  an  addressograph,  which 
also  stamps  the  same  details  on  the  stub.  Receipt  of  the  interest 
is  acknowledged  on  the  bond  and  entered  in  the  account.  The 
cash  or  check  received  is  entered  with  other  payments  on  the 
bond  and  mortgage  teller's  report,  which  is  the  basis  for  entry  in 
the  petty  cash  book  and  the  general  records. 

As  unpaid  taxes  and  assessments  become  liens  prior  to  a  first 
mortgage,  it  is  to  the  bank's  interest  to  be  sure  that  such  liabilities 
are  paid.  Therefore,  once  a  year,  the  savings  bank  employs  a 
tax-searcher  to  search  the  county  records  for  any  unpaid  taxes 
recorded  on  property  mortgaged  with  the  bank.  A  notice  is  sent 
to  all  delinquents,  and  an  auxiliary  file  is  kept  of  them  by  their 
mortgage  numbers  until  final  payment  of  the  liens  is  recorded 
thereon. 

The  Stock  and  Bond  or  Investment  Records 

The  stock  and  bond  records,  the  last  of  the  three  principal 
subsidiary  records,  are  kept  in  connection  with  the  performance 
of  the  executive  department's  fourth  function,  that  of  investing 
in  stocks  and  bonds.  They  are  controlled  by  the  general  ledger 
account,  Stocks  and  Bonds.  The  basis  of  the  records  is  a  loose- 
leaf  ledger  known  as  the  "amortization  schedules  book,"  divided 
into  a  number  of  sections,  such  as  General  Bonds,  Bonds  of  States, 
Bonds  of  Cities  in  this  State,  Railroad  Mortgage  Bonds,  etc. 
The  sheets  in  each  section  are  alike.  At  the  top  in  the  heading 
are  recorded  the  name  of  the  bond  issue,  the  date  of  purchase, 
interest  dates,  nominal  rate,  and  due  date.  Vertical  columns 
from  left  to  right  are  entitled.  Periods  Ending,  Interest,  Net  In- 
come, Reduction  or  Accumulation,  Investment  Value,  and  Par 
Value.  Horizontal  rulings  indicate  each  6  months'  period  ending 
June  30  or  December  31.  In  the  subdivisions  of  this  book  the 
different  issues  (one  sheet  for  each)  are  filed  by  maturity  date. 
Thus,  if  the  bank  buys  10  Pennsylvania  Railroad  bonds,  due  in 
1938,  say,  at  a  cost  of  104,  a  loose-leaf  ledger  sheet  is  filled  out 
and  filed  by  the  year,  1938,  in  the  Railroad  Mortgage  Bonds  sec- 


SAVINGS  BANK  ACCOUNTING  117 

tion.  By  ''investment  value"  is  meant  the  cost  value  after 
giving  effect  to  the  periodic  amortization.  Thus,  the  amortiza- 
tion schedules  book  carries  all  the  details  of  each  issue,  the  most 
important  points  of  which  are  the  effective  net  income  and  the 
investment  value  at  the  end  of  each  period. 

Another  securities  book  is  a  summary  ledger  known  as  the 
"stock  and  bond"  ledger.  This  record  shows  the  securities  filed 
by  the  name  of  the  issuing  municipality  or  corporation.  Thus, 
the  bank  may  own  ten  or  more  different  issues  of  New  York  City 
bonds.  In  the  amortization  schedules  book  these  bonds  would 
be  filed  with  other  bonds  under  the  caption  of  "Bonds  of  Cities  in 
This  State"  by  the  date  of  their  maturity  and  so  would  probably 
be  scattered  throughout  the  subdivision;  whereas  in  the  stock 
and  bond  ledger  the  lo  issues  would  be  on  one  sheet  entitled  and 
filed  as  "New  York  City  Bonds  (or  Stock),"  thus  summarizing 
in  one  place  the  various  issues  held  by  the  bank  and  showing  the 
total  amount  of  the  holdings.  The  ruling  of  this  ledger  is  of  the 
ordinary  type. 

Amortization 

A  complete  statement  of  the  principles  of  actual  amortization 
with  illustrations  of  the  formulae  involved  is  beyond  the  scope 
of  the  present  chapter.  A  detailed  account  will  be  found  in  the 
second  voliune  of  this  series,  pages  269-276.  If  the  cost  of  the 
security,  and  the  nominal  and  effective  interest  rates  are  known, 
the  amortization  is  an  easy  matter.  Thus,  if  $1,029.12  is  paid 
for  a  bond  with  an  interest  rate  of  5%  to  yield  3%,  the  semiannual 
nominal  interest  is  $25  (2  1/2%  of  $1,000)  and  the  effective  in- 
terest is  $15.44  (i  i/2%of  $1,029.12),  obviously  the  bond  is  $9.56 
nearer  its  maturity  value  and  so  this  is  the  amount  of  the  amor- 
tization. Therefore,  the  difference  between  the  nominal  and 
effective  interest  returns  is  the  amount  of  the  amortization — 
here  $9.56.  If  it  were  a  discount  bond  the  effective  interest 
would  be  greater  than  the  nominal  return,  but  the  difference 
would  still  be  the  amount  of  amortization. 


Ii8 


ACCOUNTING— THEORY  AND  PRACTICE 


An  amortization  and  investment  value  schedule  for  the  illus- 
tration above  is  as  follows: 


Nominal 
Rate 

Effective 
Rate 

Amortization 

Investment 
Value 

Par  Value 

$25.00 
25.00 
25.00 

$15.44 
15-29 
15-15 

$9.56 
9.71 
9-85 

$1,029.12 

1,019-55 
1,009.85 
1,000.00 

$1,000.00 

Recording  the  Amortization 

At  the  end  of  the  6-month  fiscal  periods  the  amortization  is 
entered  for  each  issue  on  each  sheet  in  the  amortization  schedules 
book.  On  the  summary  stock  and  bond  ledger  the  bond  ac- 
count for  each  class  of  issue  is  written  up  or  down  correspond- 
ingly. The  total  amortization  is  entered  on  the  general  journal 
as  a  charge  or  credit  to  Profit  and  Loss,  depending  on  whether 
the  effective  interest  returns  for  the  period  are  greater  or  less 
than  the  nominal  returns,  and  the  offsetting  entry,  credit  or 
debit,  is  to  the  Stock  and  Bond  account  in  the  general  ledger. 
A  detailed  list  of  the  amortization  in  the  classes  of  securities  held 
is  entered  in  the  journal  in  the  descriptive  section.  Postings  are 
made  to  the  stock  and  bond  ledgers  from  this  list. 

Theoretically,  the  amortization  amount  should  be  run  through 
the  Interest  Income  account.  Here,  for  purposes  of  reporting 
and  separation,  it  is  handled  as  explained  above. 

The  Cash  Book  System 

Unlike  the  informal  cash  records  kept  by  the  other  tellers, 
the  bond  and  mortgage  teller,  in  some  banks,  keeps  a  teller's 
cash  book,  from  which  he  makes  up  his  daily  summary.  In 
addition,  three  major  cash  books  are  kept:  (i)  a  petty  cash  book 


SAVINGS  BAxNK  ACCOUNTING  II9 

which  contains  all  items  of  income  and  disbursements,  the  sources 
of  which  are  explained  below;  (2)  a  monthly  report  cash  book 
in  which  these  items  are  summarized;  (3)  the  general  cash  book,  a 
memorandum  record,  in  which  the  entries  are  again  summarized. 

The  sources  of  entry  for  the  petty  cash  book  are  the  several 
tellers'  summaries  and  the  memoranda  sent  in,  usually  from  the 
bond  and  mortgage  department.  The  summaries  have  already 
been  explained.  When  a  mortgage  loan  is  granted  and  a  check 
is  given  to  the  borrower  for  the  amount  of  the  mortgage,  as  a 
memorandum  for  the  cash  system,  the  lawyer's  order — which 
states  that  everything  is  satisfactory  and  the  loan  may  be  made — 
is  sent  to  the  bond  and  mortgage  teller  who  is  also  the  petty  cash 
bookkeeper.  Any  other  check  disbursements  are  also  sent  to  the 
petty  cashier  in  the  form  of  memoranda. 

The  petty  cash  book  has  two  columns  on  each  page  and  one 
page  or  more  is  allotted  to  a  day's  business.  The  left  column 
shows  at  the  top:  (i)  the  opening  cash  balance;  (2)  the  amounts 
received  from  depositors  with  detail  for  each  teller's  report;  and 
(3)  incidental  receipts,  such  as  mortgage  principal  and  interest 
payments  in  detail,  checks,  and  the  like.  In  the  right  column 
are  disbursements  of  the  money  received,  consisting  of:  (i)  de- 
posits taken  to  other  banks;  (2)  the  amounts  paid  by  the  paying 
teller  to  depositors;  and  (3)  any  petty  payments,  such  as  expenses. 
Therefore,  the  left  column  with  the  opening  balance  increased  by 
deposits  and  incidental  receipts,  less  the  right  column,  containing 
the  detailed  sums  taken  to  depository  banks,  and  the  withdrawals 
of  customers,  and  any  petty  payments,  should  equal  the  cash  on 
hand.  At  the  foot  of  the  right  column  is  a  section  entitled ' '  state- 
ment of  cash"  to  show  the  detailed  amounts  in  bills,  gold,  and 
silver  on  hand  at  the  close  of  the  day  in  the  vault  and  in  each 
teller's  cash  drawer;  also,  in  the  left  column  there  is  a  space  at 
the  bottom  for  cash  over  and  in  the  right  column  for  cash  short. 

From  the  detailed  entries  in  the  petty  cash  book,  summaries 
are  made  to  the  second  of  the  major  cash  books  already  referred 
to — the  monthly  report  cash  book — so  named  because  its  sum- 


120  ACCOUNTING— THEORY  AND  PRACTICE 

maries  constitute  the  report  of  the  cash  changes  for  the  month 
presented  to  the  attending  committee.  For  each  month  two 
pages  facing  each  other  are  used  in  this  monthly  report  cash  book. 
The  left  page  shows  all  cash  receipts  of  whatever  nature. 
Columnar  sections  are  provided  for  the  receipts  from  investments 
with  description  (because  receipts  from  investments  are  generally 
received  by  mail  in  the  form  of  checks,  they  are  not  put  through 
the  petty  cash  book) ;  principal  and  interest  receipts  from  bonds 
and  mortgages;  receipts  from  depositors  with  data  as  to  the 
number  of  deposits,  the  number  of  accounts  opened,  and  the 
amounts;  and  receipts  from  other  miscellaneous  sources,  such  as 
the  sale  of  real  estate,  or  cash  over,  etc. 

The  monthly  report  cash  book  is  ruled  with  horizontal  lines 
^one  for  each  day  of  the  month.  At  the  bottom  of  the  left  page 
is  a  section  for  the  summary  of  cash  receipts.  The  right-hand 
page  contains  sections  for  payments;  these  include  payments  to 
depositors,  the  amounts  lent  on  bonds  and  mortgages,  the  cost  of 
investments — with  columns  for  the  cost,  the  par  value,  the  pre- 
mium, and  interest  yield — and  sections  for  expenses  paid,  and 
other  disbursements.  At  the  bottom  there  is  provision  for  a 
summary  of  disbursements  by  sections,  which  summary  when 
added  to  the  cash  balance  section,  also  at  the  bottom,  should 
equal  the  summary  of  receipts  section  at  the  bottom  of  the  left 
page. 

Thus,  while  the  petty  cash  book  has  a  page  for  each  day  with 
details  of  each  individual  item  of  income  and  disbursement,  the 
monthly  report  book  has  one  line  as  a  summary  for  each  class  of 
income  and  disbursement.  In  other  words  the  two  pages  of  the 
monthly  report  contain  the  summaries  by  sections  of  the  petty 
cash  book's  individual  details  spread  over  30  pages.  The  petty 
cash  book  does  not  state  the  amounts  on  deposit  in  other  banks, 
which  information  is  recorded  only  in  the  monthly  report  book. 
Postings  to  the  general  ledger  are  made  from  the  monthly  report 
book's  daily  summaries. 

The  third  major  cash  book,  the  general  cash  book,  has  debit  and 


SAVINGS  BANK  ACCOUNTING  121 

credit  columns  on  each  page,  like  the  old-style  cash  book.  After 
the  dates  are  entered  details  of  the  accounts  affected,  descrip- 
tions, and  the  summarized  amounts  of  the  various  items  of  cash 
receipts  and  payments.  At  the  bottom  of  the  usual  six  or  seven 
summaries  for  each  day  is  entered  a  memorandum  of  the  day's 
balance.  Because  no  postings  are  made  from  this  book  it  could 
be  dispensed  with,  all  the  necessary  information  being  in  the 
monthly  report  book.  Actually,  however,  hardly  lo  minutes 
are  required  to  enter  the  facts  it  contains  and  it  is  valuable  as  a 
concentrated  summary  of  the  day's  cash  transactions.  The  cash 
book  system  may  vary  according  to  the  size  of  the  bank,  but 
the  methods  described  above  may  be  taken  as  typical  of  the 
accounting  in  a  large  institution. 

The  General  Ledger  Accounts 

The  main  record  to  which  all  transactions  lead,  is  the  general 
ledger,  the  cornerstone  of  the  accounting  edifice.  The  general 
ledger  contains  the  controlling  accounts  for  the  depositors  ledgers, 
the  bond  and  mortgage  ledger,  the  stock  and  bond  ledger,  the 
real  estate  ledger,  and  for  cash.  The  two  main  sources  of 
entry  for  the  general  ledger  are  the  general  journal  and  the  cash 
books.  The  general  journal  contains  non-cash  transactions, 
such  as  a  summary  of  the  bond  amortization  every  6  months, 
real  estate  acquired  under  foreclosure,  and  the  like. 

In  all  there  are  only  about  20  accounts  in  the  main  ledger. 
In  the  light  of  the  preceding  discussion  a  brief  description  of 
each  account  will  complete  the  bird's-eye  view  of  the  accounting 
system  as  a  whole. 

Cash.  This  is  the  controlling  account  of  the  entire  cash 
system.  It  includes  all  funds  on  hand  and  on  deposit  in  other 
banks. 

Loans  on  Pass-Books.  These  are  loans  made  to  customers 
and  the  collateral  is  the  pass-book  lodged  with  the  bank.  Such 
assignments  are  usually  made  by  customers  in  need  of  money, 
at  a  time  when  to  draw  cash  from  their  account  would  involve  the 


122  ACCOUNTING— THEORY  AND  PRACTICE 

loss  of  interest  already  accumulated.  In  the  state  of  New  York 
such  loans  are  made  in  the  form  of  90-day  notes  and  up  to  90% 
of  the  collateral. 

Loans  on  Notes.  Savings  banks  seldom  lend  on  promissory 
notes.  It  is  legal,  however,  to  lend  an  amount  not  in  excess  of 
90%  of  the  collateral  deposited  with  the  bank  and  this  account 
represents  such  loans. 

Interest  Due  and  Accrued.  This  account  is  set  up  at  the  end 
of  6  months  to  show  the  asset,  interest  due  and  accrued  but  not 
yet  paid.  It  is  not  essential,  however,  to  set  up  a  separate  ac- 
count for  such  interest,  for  it  can  be  shown  as  well  in  the  Interest 
account. 

Insurance.  This  account  represents  the  amount  of  prepaid 
or  unexpired  insurance.  It  is  a  deferred  asset  account  showing 
the  result  of  the  semiannual  insurance  policy  examination  for  the 
purpose  of  determining  the  unexpired  amount.    • 

Stocks  and  Bonds.  This  controlling  account  records  the 
investment  value  of  the  securities  owned  by  the  bank.  Its 
operation  will  be  explained  later. 

Bonds  and  Mortgages.  A  controlling  account  representing 
the  amount  of  the  loans  for  which  mortgages  have  been  received 
as  security. 

Banking  House.  This  account  represents  the  total  value  of 
the  bank's  place  of  business  together  with  all  the  furniture  and 
fixtures,  vaults,  cages,  and  so  on.  Such  assets  are  usually 
valued  at  a  nominal  amount,  for  the  sake  of  conservatism. 

Other  Real  Estate.  This  controlling  account  includes  all 
property  other  than  the  banking  house,  such  as  property  ac- 
quired by  foreclosure.  The  subsidiary  ledger  is  known  as  the 
"other  real  estate"  ledger. 

Depositors.  This  is  a  controlling  capital  liability  account  and 
represents  the  amount  the  bank  owes  its  depositors. 

Taxes  Accrued.  This  represents  the  taxes  due  and  unpaid; 
it  is  adjusted  semiannually. 

Weekly  Savings  Club.    The  amount  owed  depositors  under 


SAVINGS  BANK  ACCOUNTING  123 

this  form  of  saving  in  accordance  with  which  a  dollar  a  week  is 
deposited  for  fifty  weeks.  The  bank  gets  the  use  of  the  money 
without  paying  interest  and  the  depositor  has  the  benefit  of  the 
compulsory  saving. 

Surplus.  This  represents  the  excess  of  the  assets  over  the 
liabilities.  In  a  mutual  savings  bank  this  account  represents 
the  amount  of  the  net  worth. 

The  accounts  above  are  all  balance  sheet  accounts;  those  to 
follow  belong  to  the  profit  and  loss  summary. 

Interest.  This  account  represents  the  amount  of  income  re- 
ceived from  the  three  principal  sources  of  income,  namely,  in- 
terest on  stocks  and  bonds,  on  bonds  and  mortgages,  and  on 
the  moneys  in  depository  banks.  The  monthly  report  cash 
book  contains  the  details  of  how  much  is  received  from  each 
source. 

Inspections  and  Fees.  This  account  shows  the  amount  of 
income  received  from  charges  for  property  inspection  on  account 
of  mortgage  loans  and  the  fees  due  the  bank  for  inspections 
made  after  fires  and  the  like. 

Other  Real  Estate  Rents.  The  income  received  from  rent  of 
the  bank's  other  real  estate. 

Stock  and  Bond  Sales.  This  account  represents  the  profit  or 
loss  from  the  sale  of  investment  securities.  Thus,  when  bonds 
are  sold.  Cash  is  debited  and  Stock  and  Bond  Sales  credited;  then 
Stock  and  Bond  Sales  are  charged  with  the  investment  value  of 
the  securities  sold  and  Stocks  and  Bonds  account  is  credited. 

Other  Real  Estate  Sales.  This  account  is  similar  in  principle 
to  the  Stock  and  Bond  Sales  account,  showing  the  profit  or  loss 
on  the  sale  of  the  bank's  real  estate. 

These  two  accounts  thus  show  the  profit  or  loss  on  these  two 
types  of  sales. 

Expenses.  This  account  gathers  all  costs  of  operating  the 
bank— from  lunches  to  taxes. 

Profit  and  Loss.  This  is  the  regular  account  for  periodic 
summarization.    No  current  entries  are  made  therein. 


124  ACCOUNTING— THEORY  AND  PRACTICE 

Dividends 

Dividends  are  an  important  feature  of  savings  bank  accounting. 
In  the  contract  between  a  stock  savings  bank  and  its  depositors 
as  to  the  rate  to  be  paid  the  latter,  the  term  used  is  "interest." 
But  where  the  bank  is  merely  the  agent  and  trustee  for  the  de- 
positors, the  word  "interest"  is  not  really  applicable.  Hence,  in 
a  mutual  bank,  where  the  depositors  are  also  partners  in  the 
profit  and  loss,  there  can  be  no  money  paid  unless  a  profit  has 
been  earned.  Indeed,  New  York  State  prohibits  the  guaranty 
of  dividends  (or  "interest,"  as  it  is  generally  called)  in  advance, 
because  the  promise  to  pay  a  certain  minimum  rate  might  cause 
the  bank  unconsciously  to  sacrifice  safety  for  higher  returns  from 
its  investments.  It  is,  therefore,  seen  that  "dividends"  is  a 
better  word  for  the  returns  received  by  depositors  than  "  interest." 

The  Guaranty  Fund 

Originally  the  law  intended  that  the  entire  profits  be  dis- 
tributed to  depositors.  Experience  soon  showed,  however,  that 
the  better  policy  was  to  set  aside  out  of  profits  a  guaranty  fimd 
against  future  contingencies.  Therefore  the  trustees  were  given 
the  power  to  withhold  whatever  earnings  they  deemed  wise  and 
now,  in  New  York  State,  a  minimum  surplus  fund  of  io%  of  the 
amount  due  depositors  must  be  maintained  constantly.  Profits 
in  excess  of  that  may  be  paid  out  in  dividends.  Extra  dividends 
must  be  paid  when  the  surplus  fund,  as  reckoned  on  the  basis  of 
the  periodic  report  to  the  superintendent  of  banks,  is  over  25% 
of  the  amount  due  depositors. 

Recording  the  Dividend 

After  the  rate  of  dividend  has  been  fixed  by  the  trustees,  it 
becomes  necessary  to  figure  the  amount  due  each  depositor. 

There  are  two  general  methods  of  figuring  the  amount  and 
entering  it  on  the  ledger  cards.  The  first  is  for  one  clerk  to 
figure  the  amount  and  post  it  in  pencil  on  the  card  and  for  another 
clerk  to  check  the  computations,  and  post  it  in  ink.    Under  the 


SAVINGS  BANK  ACCOUNTING  1 25 

second,  the  work  is  done  on  distribution  sheets,  proved,  and 
posted  to  the  cards  in  ink.  A  combination  of  the  two  methods 
is  sometimes  used,  one  clerk  figuring  the  interest  from  the  ledger 
cards  and  another  clerk  figuring  it  on  a  distribution  sheet.  The 
two  separate  results  are  then  compared.  By  this  scheme  two 
different  persons  are  employed  at  the  same  time  and  no  one 
reviews  his  own  work  for  accuracy. 

The  distribution  sheet  is  headed  "Dividend  and  Trial  Balance 
Sheet  for  January  i,  19-"  and  contains  6  columns  headed  left  to 
right:  ''Number  of  Account,"  "Amount  6  Months,"  "Amount 
3  Months,"  "No  Interest,"  "Total  of  Interest,"  "Balances."  In 
distributing,  great  care  is  needed  lest  the  days  of  grace  be  over- 
looked and  lest  the  rule  be  disregarded  that  drafts  shall  be  de- 
ducted from  the  last  deposit.  Thus,  if  there  are  deposits  of  $15 
and  $20  on  February  26  and  March  3,  respectively,  and  a  draft 
of  $25  on  March  15,  this  draft  deducted  from  the  $20  deposit  on 
March  3  leaves  $5  to  be  deducted  from  the  $15  deposit  on  Febru- 
ary 26.  Therefore,  under  the  first-of-each-month  method,  the 
$10  left  ($15  —  $5)  of  the  deposit  of  February  26  will  draw  interest 
from  March  i ;  under  the  quarterly  method  from  April  i . 

After  the  interest  calculations  have  been  compared  and 
proved,  the  totals  of  the  distribution  sheets  are  added  and 
journalized  thus: 

Profit  and  Loss 
Dividends 

Dividends 
Depositors 

The  Savings  Bank  Audit 

The  books  of  a  savings  bank  should  be  audited  not  only  for 
the  purpose  of  testing  the  work  of  the  clerical  force  and  their 
honesty  and  fidelity  but  also  to  answer  such  questions  as  these: 
Is  the  institution  solvent,  the  management  honest;  are  the  assets 
intact,  the  liabilities  as  represented,  the  policies  safe  and  sound ; 
and.is  the  work  reported  properly  to  the  managers? 


126  ACCOUNTING— THEORY  AND  PRACTICE 

In  general  there  are  four  kinds  of  audits: 

1.  The  internal  audit.  This  is  effected  by  checking  one  em- 
ployee's work  against  that  of  another  and  also  by  the  transfer  of 
a  clerk  from  one  position  to  another.  This  method  of  audit 
should  always  be  made  an  essential  feature  of  the  organization. 
Collusion,  of  course,  may  circumvent  the  effect  of  an  internal 
audit,  but  collusion  is  not  common. 

2.  The  audit  by  state  bank  examiners.  This  is  more  for  the 
purpose  of  reports  or  digests  of  the  bank's  business  than  for  au- 
diting. 

3.  The  trustee's  semiannual  audit.  This  examination  is  val- 
uable chiefly  because  of  its  appraisal  of  the  bank's  assets  rather 
than  of  any  detailed  facts  brought  to  light  by  strict  auditing, 
although  a  detailed  audit  may  be  made. 

4.  Audit  by  an  outside  party.  This  is  doubtless  the  best  kind 
of  audit.  A  certified  public  accountant,  for  instance,  is  a  special- 
ist in  such  work  and  will  state  the  facts  as  they  are  without  fear 
or  favor. 

The  two  main  things  a  bank  audit  should  determine  are: 

1.  Do  the  assets  as  represented  by  the  books  really  exist? 
To  answer  this  question  practically  all  the  assets  must  be 
examined.  In  doing  this  such  matters  as  these  must  be 
investigated:  verification  of  cash;  examination  of  loans  on 
collateral  and  the  value  of  the  collateral,  to  determine  the 
adequacy  of  the  margin;  the  regularity  and  sufficiency  of  the 
mortgage  papers;  and  the  worth  of  the  real  estate,  banking 
house,  etc. 

2.  Are  the  liabiUties  as  shown  by  the  pass-book  balances  the 
same  as  those  shown  by  the  books?  This  is  an  important  con- 
sideration because  in  most  defalcations  the  money  received  from 
depositors  is  withheld  and  they  are  credited  for  the  amount. 
Hence  the  importance  of  the  request  on  pass-books  to  "please 
present  the  book  at  regular  intervals  for  the  entry  of  interest 
and  comparison  with  the  bank's  balance,"  can  readily  be  under- 
stood. 


SAVINGS  BANK  ACCOUNTING  127 

The  Statements — Balance  Sheet 

As  in  other  business  institutions,  the  two  principal  statements 
are  the  balance  sheet  and  the  summary  of  profit  and  loss. 

There  is  little  to  explain  about  the  balance  sheet.  The  assets 
and  the  liabilities,  principally  deposits  and  accrued  taxes,  are 
set  up  as  ordinarily.  The  excess  of  assets  in  the  mutual  bank  is 
the  invested  surplus,  there  being,  as  already  explained,  no  capital 
stock.  The  correct  statement  of  the  invested  surplus  depends 
upon  the  correct  valuation  of  the  securities.  A  par  valuation 
would  obviously  be  inaccurate  because  securities  are  seldom 
worth  their  par  value.  A  cost  or  market  valuation,  whichever  is 
the  lower,  might  also  be  incorrect  if  the  market  were  abnormal. 
As  before  noted,  to  enable  all  savings  banks  to  value  their  secur- 
ity holdings  at  the  same  uniform  prices,  the  Superintendent  of 
Banks  in  New  York  State  issues  a  detailed  list  every  6  months  of 
prices  at  which  legal  investments  for  savings  banks  must  be  valued. 

In  general,  the  surplus  may  be  stated  at  three  different  values, 
investment  value,  par  value,  and  market  value  (this  last  named 
value  depending  on  the  state  superintendent's  idea  of  a  fair 
market  valuation). 

The  balance  sheet  must  be  submitted  in  the  semiannual  report 
to  the  Superintendent  of  Banks  in  New  York  State  in  a  certain 
form.  This  form  will  be  used  in  the  solution  to  the  illustrative 
problem  which  follows.  It  will  be  noted  that  the  balance  sheet  is 
not  arranged  in  accordance  with  the  liquidity  of  the  assets  or  the 
promptness  with  which  the  liabilities  will  have  to  be  met — as  the 
best  accounting  theory  advises.  The  form  is  largely  the  out- 
growth of  custom. 

It  must  be  borne  clearly  in  mind  that  the  balance  sheet  drawn 
up  with  securities  valued  at  market  will  not  conform  with  the 
books  where  securities  are  kept  on  an  investment-value  basis. 
Statements  for  internal  use,  as  distinguished  from  those  reported 
to  the  state  banking  department,  should,  of  course,  be  in  accord 
with  the  books,  and  in  whatever  form  is  best  for  management 
purposes. 


128  ACCOUNTING— THEORY  AND  PRACTICE 

Summary  of  Profit  and  Loss 

The  principles  which  govern  the  compilation  of  the  summary 
of  profit  and  loss  are  equally  regular.  The  gross  income  from  the 
three  principal  sources — stocks  and  bonds,  bonds  and  mortgages, 
banks  and  trust  companies — together  with  miscellaneous  income, 
is  shown.  From  the  total  gross  income  the  expenses  are  deducted 
and  the  balance  is  the  net  income.  After  the  net  income,  the 
amount  of  the  dividend  to  depositors  is  shown  and  finally  the  net 
surplus  for  the  period. 

The  required  legal  form  for  the  income  statement  will  also 
be  given  in  the  problem  to  follow.  Most  of  the  terms  in  this 
statement,  as  well  as  in  the  balance  sheet,  are  self-explanatory. 
Interest  income  is  a  credit  on  the  books  as  the  term,  Credit  Bal- 
ance, Interest,  in  the  income  statement,  indicates.  Also  amorti- 
zation is  a  credit  on  a  discount  bond  (if  bought  below  par)  be- 
cause it  increases  the  nominal  interest  income  and  is  a  charge 
against  nominal  interest  received  on  a  premium  bond.  "Fran- 
chise" means  the  state  tax  or  the  right  given  by  the  state  to  do 
business  as  a  savings  bank. 

Because  of  the  importance  of  the  Cash  account  in  bank 
accounting  it  is  an  aid  to  the  understanding  of  the  subject  to 
trace  the  sources  of  cash  receipts  and  the  objects  of  cash  expendi- 
ture. Therefore,  a  statement  of  cash  is  also  called  for  in  the 
problem. 

Illustrative  Problem 

Draw  up  a  balance  sheet  (legal  form),  a  summary  of  profit 
and  loss  (legal  form),  and  a  statement  of  cash  from  the 
information  given  below.  In  the  solution  given,  the  form,  so  far 
as  arrangement,  schedules,  etc.,  are  concerned,  will  be  that  used 
for  reporting  to  the  superintendent  of  banks.  However,  stocks 
and  bonds,  instead  of  being  valued  according  to  the  superinten- 
dent's list,  will  be  shown  at  their  book,  i.e.,  present  investment, 
value  so  that  the  balance  sheet  will  be  in  accord  with  the 
books. 


SAVINGS  BANK  ACCOUNTING  1 29 

The  reader  will  understand  that  in  the  formal  report  which  each 
savings  bank  is  required  to  submit  to  the  state  superintendent's 
department  at  the  close  of  each  6  months' period,  the  securities  held 
by  the  bank  at  that  time  must  be  valued  in  accordance  with  the 
superintendent's  valuation  list  and  so  incorporated  in  the  report 
of  the  balance  sheet.  Accordingly,  the  surplus  shown  thereon  will 
be  the  market  value  surplus.  Reference  to  the  form  on  page  131 
indicates  that  provision  is  made  for  showing  both  the  investment 
value  and  the  par  value  surplus  items.  The  balance  sheet  drawn 
up  for  internal  use  must,  of  course,  show  the  investment  value 
surplus,  with  market  value  carried  as  a  memorandum. 

On  July  I,  1920,  the  condition  of  the  Modern  Savings  In- 
stitution was  as  shown  in  the  following  trial  balance,  taken  from 
the  books  after  closing,  the  bonds  having  been  valued  at  present 
cost  (investment  value) : 

Banking  House  and  Lot $      250,000.00 

Bonds  of  New  York  State i, 697,355-89 

Bonds  of  Other  States 1,588,695.63 

Bonds  of  Cities,  Counties,  Towns, 
Villages,  and  School  Districts  in  New 

York  State 18,168,451.08 

Bonds  of  Cities  in  Other  States 13,029,059.37 

Railroad  Mortgage  Bonds 5,127,527.59 

Other  Real  Estate 16,718.84 

Accrued  Interest 777,773-33 

Cash  on  Hand 501,619.97 

Cash  on  Deposit  in  Banks  and  Trust 

Companies 4,324,541.38 

Deferred  Insurance 2,368.92 

Bonds  and  Mortgages 43,678,050.00 

Accrued  Taxes $       40,000.00 

Deposits 76,865,888.29 

Surplus 12,256,273.71 

$89,162,162.00    $89,162,162.00 

The  following  trial  balance  taken  before  closing  and  covering 
the  6  months'  business  ending  December  31,  1920,  shows  the 
condition  on  that  date: 

VOL.  Ill — 9 


130  ACCOUNTING— THEORY  AND  PRACTICE 

Cash  on  Hand $       402,967.43 

Cash  on  Deposit 4,419,719.27 

Interest  on  Stocks  and  Bonds $522,315.86 

Interest  on  Bonds  and  Mortgages 643,837.76 

Interest  on  Deposits  in  Other  Banks. . .  50,512.39 

Unexpired  Insurance 2,591.42 

Bonds  and  Mortgages 45,188,075.00 

Bonds  of  Various  States 3,298,544.24 

Bond  and  Mortgage  Inspections 1,220.00 

Petty  Expenses :  . .  2,269.07 

Stationery  and  Postage 1,627.15 

Advertising 3,836.10 

Salaries 73,010.00 

Taxes 1,620.24 

State  Banking  Department 605.31 

American  Bankers'  Association  Dues .  . .  75-oo 

Banking  House  and  Lot 250,000.00 

Other  Real  Estate 41,698.25 

Railroad  Mortgage  Bonds 5,066,649.21 

Bonds  of  Cities,  Counties,  etc.,  in  New 

York  State 17,970,975.15 

Bonds  of  Cities  in  Other  States 14,608,422.87 

Franchise  Tax 51,343.76 

Cash  Short  and  Over 25.54 

Amortization  of  Bond  Premiums 57,458.24 

Amortization  of  Bond  Discounts 1,552.66 

Deposits 77,965,801.37 

Surplus 12,256,273.21 


)i,44i,5i3-25     $91,441, 513-25 


There  was  also  interest  accrued  of  $300,000  on  stocks  and 
bonds,  of  $484,574.65  on  bonds  and  mortgages,  of  $10,000  on 
bank  deposits.  A  semiannual  dividend  at  the  annual  rate  of 
4%  and  amounting  to  $1,481,835  was  due  depositors.  The  worth 
of  the  bank's  securities  on  December  31,  as  set  by  the  superin- 
tendent's price  list,  was  $39,391,416.12.  Their  total  par  value 
amounted  to  $39,193,000. 


SAVINGS  BANK  ACCOUNTING 


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132  ACCOUNTING— THEORY  AND  PRACTICE 

Schedule  i 

Bonds  of  Various  States $    3,298,544.24 

Bonds  of  Cities,  Counties,  Towns,  etc.,  in  N.  Y 17,970,975.15 

Bonds  of  Cities  in  Other  States 14,608,422.87 

Railroad  Mortgage  Bonds 5,066,649.21 

Total  (Present  Cost) $40,944,591.47 


Schedule  2 
Banking  House  and  Lot  (in  detail) $      250,000.00 

Schedule  3 
Other  Real  Estate  (in  detail) $       41,698.25 

Schedule  4 
Cash  on  Deposit  in  Banks  or  Trust  Companies  (in  detail)    $  4,419,719.27 

Schedule  5 
Cash  on  Hand  (in  detail) $     402,967.43 

Schedule  6 

Interest  Accrued  on  Stocks  and  Bonds $     300,000.00 

Interest  Accrued  on  Bonds  and  Mortgages 484,574.65 

Interest  Accrued  on  Deposits  in  Other  Banks 10,000.00 

Total  Collectible  Interest $     794,574.65 

Schedule  7 
Deferred  Insurance $  2,591.42 


SAVINGS  BANK  ACCOUNTING  133 

Exhibit  B 

The  Modern  Savings  Institution 

Summary  of  Profit  and  Loss 

For  the  Six  Months  Ending  December  31,  1920 

Credit  Balance,  Interest  (Schedule  i) $2,011,240.66 

Credit  Balance,  Other  Income  (Schedule  2) 1,220.00 

Amortization  on  Stocks  and  Bonds 1,552.66 

Gross  Income $2,014,013.32 

Debit  Balance,  Expense  (Schedule  3) $83,042.87 

Franchise 51,343.76 

Amortization  on  Stocks  and  Bonds 57,458.24 

Debit  Balance,  Cash  Short  and  Over 25.54  191,870.41 

Net  Income $1,822,142.91 

4%  Dividend  to  Depositors 1,481,835.00 

Balance  Carried  to  Surplus $   340,307.91 

Schedule  i 

Interest  on  Stocks  and  Bonds $    822,315.86 

Interest  on  Bonds  and  Mortgages 1,128,412.41 

Interest  on  Deposits  in  Other  Banks 60,512.39 

Total  Interest $2,011,240.66 

Schedule  2 

Bond  and  Mortgage  Inspections $        1,220.00 

Schedule  3 

Petty  Expenses $        2,269.07 

Stationery  and  Postage 1,627.15 

Advertising 3,836.10 

Salaries 73,010.00 

Taxes '• 1,620.24 

State  Banking  Department 605.31 

American  Bankers'  Association 75-oo 

Total  Expense , , ,  $83,042.87 


134 


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SAVINGS  BANK  ACCOUNTING  1 35 

Schedule  i 

Depositors,  December  31,  1920  (before  dividends) $77,965,801.37 

Depositors,  July  i,  1920  (after  dividends) 76,865,888.79 


Net  Cash  Received $  1,099,912.58 


Schedule  2 

Accrued  Interest,  JiUy  i,  1920 $      777,773-33 

Interest  (paid  in  cash),  December  31,  1920 1,216,666.01 


Net  Cash $  1,994,439.34 


Schedule  3 
Bond  and  Mortgage  Inspections $1,220.00 


Schedule  4 

Bonds  and  Mortgages,  December  31,  1920 $45,188,075.00 

Bonds  and  Mortgages,  July  i,  1920 43,678,050.00 


Net  Cash  Paid $  1,510,025.00 


Schedule  5 

Stocks  and  Bonds,   December  31,    1920   (Exhibit  A, 

Schedule  i) $40,944,591.47 

Net  Amortization S5,90S-S8 


$41,000,497.05 
Stocks  and  Bonds,  July  i,  1920 39,611,089.56 


Net  Cash  Paid $  1,389,407.49 


Schedule  6 

Total  Expenses  (Exhibit  B,  Schedule  3) $  83,042.87 

Franchise  Tax $51,343.76 

Accrued  Taxes,  July  I,  1920 40,000.00  91,343.76 


Net  Cash  Paid $1 74,386.63 


136  ACCOUNTING— THEORY  AND  PRACTICE 

Schedule  7 

Other  Real  Estate,  December  31,  1918 $41,698.25 

Other  Real  Estate,  July  i,  1918 16,718.84 

Net  Cash  Paid $24,979.41 

Schedule  8 

Cash  Short  and  Over $  25.54 

Deferred  Insurance,  December  31,  1918 $2,591.42 

Deferred  Insurance,  July  i,  1918 2,368.92  222.50 

Net  Cash  Paid $248.04 


CHAPTER  V 

BITUMINOUS   COAL  MINE  ACCOUNTING 
By  William  J.  Thompson 

I.  Classification  of  Accounts 

Coal  Mining  and  Collateral  Operations 

The  organization  of  a  coal  mining  business  sometimes  involves 
several  coal  mining  properties.  In  any  event,  however,  whether 
it  be  one  or  more  than  one  property,  the  mining  operations  are 
usually  surrounded  by  several  collateral  operations  at  each 
property.  Coal  mines  are  not  always  to  be  found  in  settled  com- 
munities. Usually  it  is  the  case,  in  the  West,  that  the  town  is 
the  outgrowth  of  mining  operations. 

In  order  to  develop  and  to  operate  a  coal  mine  it  is  necessary 
for  the  company  to  employ  labor  and  these  employees  must  be 
enabled  to  secure  dwellings  and  boarding  houses  in  which  to  live. 
This  may  require  the  construction  of  a  town  or  mining  camp  in- 
cluding churches,  schools,  and  hospitals.  It  is  necessary  that 
they  have  the  means  of  securing  food  and  clothing.  This  may 
require  the  operation  of  stores.  Places  of  amusement  and  recrea- 
tion should  be  provided.  This  necessitates  investment  in  picture 
shows,  billiard  rooms,  bowling  alleys,  and  the  like.  Coal  mines 
use  large  quantities  of  timber  in  their  operations.  As  an  assur- 
ance of  supply,  or  on  account  of  decreased  cost,  the  company 
may  cut  its  own  timber  from  lands  owned  or  leased.  The  sur- 
face lands  may  be  cultivated  and  farming  operations  carried 
on  to  raise  hay  and  grain  for  the  live  stock  used  at  the  mine. 
The  company  may  maintain  a  coking  plant  at  the  mine  and 
market  part  of  its  production  in  the  form  of  coke  instead  of  as 
coal. 

137 


138  ACCOUNTING— THEORY  AND  PRACTICE 

Method  of  Coal  Production 

When  coal  land  is  acquired,  the  first  operation  is  to  open  and 
develop  the  coal  body.  This  must  be  done  with  rare  good  judg- 
ment, as  on  it  depends  the  successful  working  of  the  property, 
A  competent  engineer  must,  therefore,  be  employed  for  this 
development  work. 

When  the  coal  seam  has  been  opened,  the  mining  operations 
begin  in  earnest.  The  coal  is  dislodged  by  powder  blasting,  is 
loaded  into  mine  cars,  and  is  hauled  to  the  surface  to  be  loaded 
into  railroad  cars.  In  these  operations  the  workers  may  be 
divided  into  three  general  classes — Inside  or  Bottom  Men, 
Outside  or  Top  Men,  and  Superintendence. 

First  in  the  order  of  the  Inside  Men  is  the  miner,  who  actually 
produces  the  coal.  He  is  usually  paid  per  ton  of  coal  loaded  into 
mine  cars  plus  allowances  for  special  work,  which  are  covered  by 
contract.  Those  employed  in  the  collateral  mine  work,  such  as 
installing  and  maintaining  mine  tracks,  power  lines,  ventilation 
courses,  drainage  systems,  etc.,  and  operating  electric  locomo- 
tives, hoists,  etc.,  also  the  mine-examiners,  engineers,  and  bosses 
— these  men  are  the  Inside  Company  Men.  They  are  usually 
employed  on  an  hourly,  daily,  or  monthly  basis.  The  Outside 
or  Top  Men  are  also  Company  Men  and  are  likewise  paid  by  the 
hour,  day,  or  month.  The  mine  superintendent,  mine  engineer, 
office  men,  and  various  foremen,  top  and  bottom,  comprise  the 
superintendence  force. 

The  coal  is  hauled  to  the  surface  by  mules  or  by  machinery 
to  an  elevated  structure  called  a  ''tipple"  in  the  case  of  bitumi- 
nous mines,  which  are  the  principal  subject  of  discussion.  At  the 
tipple  the  coal  is  dumped  by  means  of  mechanical  devices  into 
the  hopper  scales  and  then,  after  being  weighed,  into  a  chute 
from  which  it  slides  into  the  railroad  car  below.  This  simple 
loading  method  is  used  at  tipples  not  equipped  with  screening  or 
other  preparation  machinery.  Coal  not  screened  into  sizes  is 
called  "mine  run,"  or  " run-of-mine "  coal.  F(  r  the  domestic 
and  industrial  consumer  most  coal  is  graded  in  size  and  the  proc- 


BITUMINOUS  COAL  MINE  ACCOUNTING  1 39 

ess  of  grading  is  known  as  "screening."  Bituminous  coal  is 
screened  into  various  sizes,  commonly  known  as  "lump,"  "egg," 
"nut,"  "pea,"  and  "slack." 

In  the  anthracite  mining  more  elaborate  means  of  preparing 
the  coal  are  used.  Here  it  is  necessary  to  break  the  coal  into 
various  sizes  and  remove  slate,  dirt,  dust,  and  other  impurities. 
The  coal  is  broken  in  the  "breaker,"  a  large  structure  in  which 
the  coal  as  it  passes  through  is  crushed  between  rollers,  screened, 
and  picked  by  hand  or  machinery.  In  the  last  twenty  years  or  so 
the  coal  in  the  large  deposits  of  culm,  or  discarded  material  lying 
next  to  the  breakers,  has  been  reclaimed  by  passing  it  through  a 
washing  operation.  The  special  structures  in  which  these 
operations  are  carried  on  are  called  "washeries." 

The  electric  power  used  in  operating  the  mine  plant  may  be 
either  purchased  from  an  outside  company  or  generated  in  the 
company's  own  power  plant.  In  addition  to  the  tipple  and  power 
plant,  other  outside  operating  structures  usually  provided  are  a 
blacksmith  andmachine-shop,materialhouse,powderhouse,barns, 
granaries,  fan  houses  for  the  ventilation  machinery,  outside  tram- 
way structures  when  coal  is  trammed  for  a  considerable  distance 
from  the  mine  opening  to  the  tipple,  railroad  tracks  and  bridges,  if 
such  trackage  must  be  constructed,  buildings  used  in  welfare  work, 
such  as  bath  houses  and  first-aid  hospitals,  and  office  buildings. 

Mine  Accounts  and  Accounting 

From  the  above  explanation  it  follows  that  coal  mine  account- 
ing must  be  so  organized  and  arranged  that  the  investment  in, 
and  the  operating  income  and  expense  of,  the  main  operation — 
the  extraction  and  marketing  of  the  coal — and  of  each  collateral 
operation,  will  be  shown  separately.  Furthermore,  in  the  event 
that  more  than  one  property  is  operated,  the  information  should 
be  classified  similarly  for  each  property.  This  distinction  is 
effected  either  by  using  separate  sets  of  records  for  some  or  all 
of  the  collateral  operations,  to  be  controlled  by  controlling  ac- 
counts on  the  general  ledger,  or  by  grouping  like  accounts  cover- 


140  ACCOUNTING— THEORY  AND  PRACTICE 

ing  all  operations  under  such  significant  titles  as  will  readily 
permit  statements  of  investment  or  earnings  to  be  prepared  and 
results  from  all  operations  to  be  separately  shown. 

The  mine  office  and  general  offices  are  not  usually  located 
together,  especially  when  more  than  one  property  is  operated. 
In  the  West  the  general  offices  are  almost  invariably  situated  in  a 
city  which  may  be  hundreds  of  miles  from  the  mine.  The  com- 
bination of  the  two  offices  eliminates  many  reports  and  much 
clerical  work.  There  is  no  need  to  explain  the  forms  of  the  re- 
ports and  methods  of  handling  the  accounting  work  when  the 
offices  are  apart. 

It  is  thought  that  setting  forth  in  brief  outhne  a  general 
classification  of  accounts  and  its  use  under  certain  conditions,  a 
form  of  cost  and  earning  statement,  and  the  distinctive  forms 
used,  will  be  sufficient  to  equip  the  student  with  a  general  knowl- 
edge of  coal  mine  accounting.  If  he  understands  the  fundamental 
principles  of  accounting,  he  should  then  be  able  to  install  a  sys- 
tem of  coal  accounts,  after  familiarizing  himself  with  local  condi- 
tions; or,  at  least,  he  should  have  a  better  knowledge  of  such  a 
system  than  he  could  acquire  from  memorizing  forms  and 
routine  systems  of  limited  application. 

Account  Classification 

The  following  classification  is  presented  as  a  working  guide 
for  the  student.  It  combines  ideas  of  the  National  Coal  Associa- 
tion, the  Federal  Trade  Commission,  the  Interstate  Commerce 
Commission,  and  practical  coal  mine  operators,  and  is  in  harmony 
with  the  Treasury  Department's  rulings  regarding  federal  income 
and  profit  taxes. 

General  Balance  Sheet  Accounts  and  Profit  and  Loss 

Number  Title 

20 1  Real  Estate 

Subdivided  on  the  general  ledger  into  separate  accounts 

as  follows: 


BITUMINOUS  COAL  MINE  ACCOUNTING  I41 

201  (a)  Coal  Lands 

201  (b)  Undeveloped  Coal  Lands 

201  (c)  Surface  Lands 

201  (d)  Leaseholds 

202  Investment  in  Mine  Plant  and  Equipment 

This  is  a  general  summary  or  controlling  account,  and 
includes  the  total  of  the  company's  investment  in  mine,plant 
and  equipment,  which  is  more  fully  described  and  classified 
by  the  investment  accounts  numbered  i  to  40,  as  is  shown 
in  subsequent  pages.  These  accounts  should  be  either  re- 
flected in  a  subsidiary  plant  ledger  with  a  separate  sheet  for 
each  account,  or  summarized  in  some  systematic  form  in  a 
subsidiary  abstract  record  which  permits  of  an  accurate 
analysis  of  the  accounts. 

203  Investment  in  Tenant  Buildings  and  Camp 

This  is  a  controlling  account  kept  in  a  manner  similar  to 
Account  202 .  It  includes  the  investment  in  tenant  buildings 
and  camp  as  described  and  classified  by  the  investment 
accounts  numbered  43  to  47, 

204  Investment  in  Mercantile  Operations 

A  control  account  controlling  the  original  capital  ad- 
vances to  mercantile  operations  plus  subsequent  additions. 
(See  Account  213  (a)  for  profits  due) .  In  this  classification 
the  mercantile  operations  are  handled  as  separate  depart- 
ments, with  their  own  sets  of  books,  records,  and  accounts 
to  reflect  their  operations.  (In  actual  practice  use  is  often 
made  of  a  firm  name  for  such  operations,  so  shghtly  different 
from  the  corporate  name  of  the  coal  mining  company  as  to 
imply  the  relationship  but  permit  of  distinguishing  the  two 
operations.) 

205  Investment  in  Other  Property    ' 

Subsidiary  records  show  the  detail  of  this  account. 

206  Investment  in  Funds  and  Securities 

Subdivided  on  the  general  ledger  into  several  subsidiary 
accounts,  viz.: 


142  ACCOUNTING— THEORY  AND  PRACTICE 

206  (a)  Reserve  Funds 

206  (b)  Sinking  Funds 

206  (c)  Bonds 

206  (d)  Stocks 

206  (e)  Other  Investments 

207  Securities  Issued — Held  in  Treasury 

This  account  shows  the  par  value  of  securities  issued  and 
held  in  the  treasury,  and  also  whether  such  securities  are 
pledged  or  unpledged. 

208  Deposits  Outstanding  on  Contracts 

209  Materials  on  Hand 

This  account  shows  the  invoice  cost,  plus  transportation 
charges,  of  materials  and  supplies  on  hand.  The  cost  of  any 
materials  used  immediately  for  a  specific  purpose  may  be 
charged  direct  to  an  appropriate  investment  or  expense  ac- 
count. Credits  to  Materials  on  Hand  are  made  from  ma- 
terial requisitions  furnished  at  the  time  material  is  issued  at 
the  material  house.  Materials  taken  into  the  mine  are 
charged  out  at  that  time  unless  taken  to  a  branch  material 
house  inside  the  mine,  in  which  case  provision  is  made  for 
accurate  record  of  transfers  to  such  branch  houses  and  issues 
therefrom.  A  monthly  material  report  is  made  at  the  Mine 
Office  to  simimarize  charges  and  credits  covering  receipts 
and  disbursements  of  materials  during  the  month. 

210  Freight  on  Materials 

This  account  is  charged  with  freight  and  express  paid  on 
materials  and  credited:  (i)  with  the  charges  taken  into 
Materials  account  by  the  mine  ofl&ce  from  the  monthly  ma- 
terial report,  and  (2)  with  the  charges  to  investment  or 
expense  accounts  for  freight  and  express  on  materials  charged 
out  direct  from  vouchers  instead  of  being  handled  through 
the  Materials  account. 

211  Coal  on  Hand  and  in  Transit 

This  account  is  subdivided  on  the  general  ledger  into 
separate  accounts,  viz. : 


BITUMINOUS  COAL  MINE  ACCOUNTING  1 43 

211  (a)  Coal  on  Hand 

This  shows  the  value,  at  production  cost,  of 
the  coal  stored  at  the  mine  and  held  for  shipment, 
the  coal  in  the  loading  chutes  or  in  partly  loaded 
cars  not  being  included.  In  coal  mining  it  is 
not  customary  to  consider  as  production,  coal 
that  although  mined  and  in  mine  cars  has  not 
at  the  close  of  a  period  been  accounted  for  at  the 
tipple  and  credited  to  the  miner.  Some  com- 
panies account  for  coal  that  has  been  credited  to 
miners  but  which  on  the  last  day  of  the  period  is 
still  in  the  screens  or  partly  loaded  in  railroad 
cars,  by  inventorying  such  coal  at  the  beginning 
and  end  of  the  period,  and  debiting  or  credit- 
ing any  decrease  or  increase  at  the  end  of  the 
period  as  compared  with  that  at  the  begin- 
ning to  an  account  such  as  57  (see  below). 

211  (b)  Coal  in  Transit 

This  account  includes  the  value  of  any 
coal  delivered  to  the  railroad  for  transporta- 
tion to  a  customer  but  for  certain  reasons 
not  yet  invoiced.  The  account  is  credited 
and  the  customer  is  charged  when  invoice  is 
rendered. 

212  Accounts  Receivable 

This  account  is  subdivided  on  the  general  ledger  into 
separate  controlling  accounts,  viz. : 

212  (a)  Accounts  Receivable — Sales  Office 
212  (b)  Accounts  Receivable — Mine  Office 
212  (c)  Employees'  Overdrafts 

This  last  account  covers  excess  of  deduc- 
tions on  pay-roll  over  earnings.  The  individual 
overdrafts  are  posted  first  in  posting  deductions 
on  pay-roll  for  the  next  period. 


144       ACCOUNTING— THEORY  AND  PRACTICE 

212  (d)  Accounts  Receivable— Miscellaneous 

A  subsidiary  ledger  should  be  kept  for  each 
class  of  accounts  receivable. 

213  Accrued  Accounts  Receivable 

This  is  subdivided  on  the  general  ledger  into  separate 
accounts,  viz. : 

213  (a)  Profits  Due  from  Collateral  Operations 
213  (b)  Accrued  Interest  Receivable 

213  (c)  Accrued  Accounts  Receivable — Miscellaneous 

214  Notes  Receivable 

This  is  subdivided  on  the  general  ledger  into  separate 
accounts,  viz. : 

214  (a)  Notes  Receivable — Trade 

214  (b)  Notes  Receivable — Special  . 

215  Subscriptions  to  Stock 

216  Other  Current  Assets 

217  Cash 

This  is  subdivided  on  the  general  ledger  into  as  many 
accounts  as  may  be  required,  as  for  instance: 
217  (a)  First  National  Bank 
217  (b)  Citizens  National  Bank 
217  (c)  Provided  for  other  possible  bank  accounts 
217  (d)  Provided  for  other  possible  bank  accounts 
217  (e)  Cash  Working  Funds — Mine  Office 
217  (f)   Cash  Working  Funds — General  Office 
217  (g)  Cash  on  Hand — Mine  Office 

217  (h)  Cash  on  Hand — General  Office 

218  Deferred  Charges 

This  is  subdivided  on  the  general  ledger  into  separate 
accounts,  viz. : 

218  (a)  Organization  Expenses 
218  (b)  Royalty  Advances 

218  (c)  Insurance  Premiums  Paid  in  Advance 
218  (d)  Deferred  Charges — Miscellaneous 


BITUMINOUS  COAL  MINE  ACCOUNTING  145 

219  Unadjusted  Debit  Items 

This  account  includes  debit  balances  which  cannot  be 
entirely  cleared  and  disposed  of  until  additional  information 
is  received,  or  debit  items  which  are  withheld  for  charge 
against  future  operations. 

230  Long-Term  Debt 

This  account  is  subdivided  on  the  general  ledger  into 
separate  accounts,  viz. : 

230  (a)  Bonds 

230  (b)  Mortgage  Notes 

231  Accounts  Payable 

This  is  subdivided  on  the  general  ledger  into  separate 
accounts,  viz. : 

231  (a)  Pay-Roll 

23 1  (b)  Unclaimed  Wages 

231  (c)  Freight  Payable 

This  last  account  covers  freight  charged  to 
customer  as  having  been  prepaid  but  which, 
as  yet,  has  not  in  fact  been  paid. 

231  (d)  Vouchers 

231  (e)  Accounts  Payable — Miscellaneous 

232  Accrued  Accounts  Payable 

Subdivided  on  the  general  ledger  into  separate  accounts, 
viz. : 

232  (a)  Accrued  Taxes 

Not  federal  income  or  profits  taxes. 
232  (b)  Accrued  Interest  Payable 

232  (c)  Accrued  Accounts  Payable — Miscellaneous 

233  Notes  Payable 

This  is  subdivided  on  the  general  ledger  into  separate 
accounts,  viz. : 

233  (a)  Notes  Payable — Trade 
233  (b)  Notes  Payable — Special 


146  ACCOUNTING— THEORY  AND  PRACTICE 

234  Other  Current  Liabilities 

235  Special  Funds  and  Deposits  Held 

236  Dividends  Declared 

237  Contingent  Liabilities 

238  Unadjusted  Credit  Items 

This  account  corresponds  to  Account  219  among  the 
debits. 

239  Reserve  for  Depletion 

240  Accrued  Depreciation 

This  is  subdivided  on  the  general  ledger  into  separate 
accounts,  viz. : 

240  (a)  Accrued  Depreciation — Development 

240  (b)  Accrued  Depreciation — Structures 

240  (c)  Accrued  Depreciation — Equipment 

240  (d)  Accrued  Depreciation — Camp 

240  (e)  Accrued  Depreciation — Miscellaneous 

241  Other  Reserves 

This  is  subdivided  on  the  general  ledger  into  separate 
accounts,  viz.: 

241  (a)  Reserve  for  Insurance 

241  (b)  Reserve  for  Uncollectible  Accounts 

241  (c)  Reserve  for  Federal  Income  and  Profits  Taxes 

241  (d)  Reserve  for  Contingencies 

242  Capital  Stock  Outstanding 

243  Capital  Stock  Subscribed 

244  Surplus 

245  Undivided  Profits 

246  Profit  and  Loss 

Investment  in  Mine  Plant  and  Equipment  Accounts 

'I'hc  accounts  in  this  classification  are  designed  to  show  in 
detail  the  investment  in  mine,  plant,  and  equipment,  and  in  the 
aggregate  should  be  in  agreement  with  the  balance  in  the 
controlling  balance  sheet  Account  2Q2. 


BITUMINOUS  COAL  MINE  ACCOUNTING  147 

All  expenditures  connected  with  the  acquisition,  construction, 
and  development  of  the  mine  plant  and  mine  equipment  are 
charged  to  these  accounts.  Such  expenditures  include  payments 
for  contract  work,  wages,  materials,  supplies,  and  miscellaneous 
items.  Incidental  revenues  received  during  the  initial  construc- 
tion period  are  credited  to  Revenue  Incident  to  Construction, 
Account  36  (see  below).  If  returns  from  sales  of  coal  taken  out 
in  the  course  of  the  initial  period  are  small  and  not  in  excess  of 
the  cost  of  production,  they  may,  at  the  end  of  the  development 
period,  be  credited  to  Development,  Account  i.  There  are  ex- 
traordinary instances,  however,  where  the  gross  returns  from 
such  coal  when  credited  to  Account  i ,  result  in  a  credit  balance  in 
that  account.  In  such  cases,  Account  i  should  be  credited  with 
an  equitable  allowance  for  the  cost  of  producing  such  coal  (in 
practice  this  cost  cannot  be  accurately  computed)  and  the  Coal 
Sales  account  to  which  the  returns  are  credited  should  be  charged. 
In  the  former  case  allowance  may  or  may  not  be  made  for  the 
depletion  value  of  the  coal  taken  out.  In  the  latter"  case  the  de- 
pletion amount  should  be  computed  and  charged  against  the 
returns.  If  the  construction  period  extends  beyond  one  year, 
depreciation  should  be  computed  on  the  depreciating  assets  used 
during  construction  and  such  cost  should  be  charged  to  General 
Expenditures,  Account  39.  Royalties  paid  during  the  develop- 
ment period  should  be  charged  to  Development,  Account  i, 
unless  they  are  recoverable  out  of  future  production  (see  Account 
84  below),  in  which  event  only  the  proportion  of  such  charges 
applicable  to  the  construction  period  should  be  so  charged,  the 
balance  being  charged  to  Royalty  Advances,  Account  218  (b). 
After  the  company  begins  regular  mining  operations,  all  costs 
covering  additions  to  or  betterments  of  the  original  mine  plant 
and  equipment,  excepting  items  of  minor  importance  (see  under 
"Structures"  and  "Equipment"  for  explanation  of  minor  items), 
are  also  charged  to  these  asset  accounts. 

The  accounts  pertaining  to  investments  in  mine  plant  and 
mine  equipment  are  grouped  in  four  general  classes,  as  follows: 


148  ACCOUNTING— THEORY  AND  PRACTICE 

I.  Development  Accounts.  At  the  close  of  the  development 
period  and  after  starting  operations,  development  accounts  are 
charged  with  the  cost  of  sinking  or  driving  more  than  50  feet, 
through  rock  or  material  other  than  coal,  the  shafts,  planes, 
slopes,  or  tunnels  necessary  to  develop  the  mine  or  some  specific 
area  of  coal.  This  cost  includes  grading,  timbering,  track  labor, 
etc.  The  cost  of  all  entry  work  on  tunnels  less  than  50  feet  in 
length,  driven  through  materials  other  than  coal  is  charged  to 
Driving  Entries,  under  "Dead  Work"  in  operating  expense. 

II.  Structures  Accounts.  In  addition  to  the  original  invest- 
ment, structures  accounts  are  also  charged  with  subsequent  addi- 
tions and  betterments.  The  cost  chargeable  to  investment 
accounts  for  betterments  is  the  excess  cost  of  new  parts  over  the 
current  price  of  those  retired.  Items  of  minor  importance  in- 
volving an  expenditure  of  less  than  $100  are  charged  to  an  expense 
account. 

III.  Equipment  Accounts.  In  addition  to  the  original  invest- 
ment, equipment  accounts  are  charged  with  subsequent  additions 
and  betterments  of  major  importance.  "Minor  items  (see 
article  222  of  Regulations  45  relating  to  the  income  tax  and  war 
profits  and  excess  profits  tax  under  the  Revenue  Act  of  1918), 
such  as  trackage,  cables,  trolley,  mules,  mine  cars,  tools,  etc., 
which  are  added  after  the  mine  has  been  developed  and  equipped 
to  its  normal  and  regular  capacity,  and  which  represent  current 
expenses  necessary  to  maintain  the  normal  output  because  of 
increased  length  of  haul  or  depth  of  working  consequent  on  the 
extraction  of  coal,  and  the  replacements  of  such  minor  items 
should  be  charged  to  expenses."  It  is  to  be  noted  that  these 
items  are  not  those  which  are  added  to  increase  output  or  those 
which  represent  an  improvement  having  a  tendency  to  increase 
the  net  income  over  that  obtainable  from  the  investment 
previously  employed  in  equipment. 

IV.  General  Expenditures.  Upon  the  completion  of  the  ini- 
tial construction  work,  the  general  expenditures  should  be 
charged  to  development,  structures,  and  equipment  accounts 


BITUMINOUS  COAL  MINE  ACCOUNTING  1 49 

upon  some  equitable  basis.  Wherever  possible,  general  expendi- 
tures should  be  allocated  direct  to  these  accounts.  The  other 
general  expenditures  should  be  distributed  over  the  plant  and 
equipment  items  as  suggested  by  conditions  and  circimistances. 

Subordinate  Plant  and  Equipment  Account  Classified 

The  primary  accounts  included  in  the  aforementioned  four 
groups  are  as  follows: 

I.  Development 
Number  Title 

I  Development 

II.  Structures 

4  Tipple 

5  Tramways  Outside 

6  Power  Plant 

7  Blacksmith-  and  Machine-Shops 

8  Railroad  Trackage 

9  Miscellaneous  Operating  Buildings  and  Structures  (Classified) 

III.  Equipment 

10  Tipple  Equipment 

1 1  Mine  Rail  and  Fastenings 

1 2  Mining  Machines 

13  Mine  Cars 

14  Other  Mechanical  Haulage  Equipment 

15  Drainage  Equipment 

16  Ventilation  Equipment 

17  Power  Plant  Equipment 

18  Power,  Light,  and  Signal  Lines 

19  Telephone  Lines 

20  Barn  Equipment 

21  Live  Stock 

22  Water  Supply  Equipment 

This  account  includes  any  equipment  used  to  obtain  water 
for  mine  operations  in  localities  where  this  is  necessary.    It 


150  ACCOUNTING— THEORY  AND  PRACTICE 

does  not  include  the  mine  drainage  equipment  or  equipment 
used  in  sprinkling  entries. 

23  First-Aid  and  Accident  Equipment 

24  Machine-  and  Blacksmith-Shop  Equipment 

25  Automobiles 

26  Tools  and  Miscellaneous  Equipment 

27  Furniture  and  Office  Equipment 

IV.  General  Expenditures 

30  Construction  Expenses 

31  UnappHed  Construction  Materials 

At  the  close  of  the  construction  period  the  value  of  this 
material  on  hand  is  charged  to  Account  209. 

32  Unfinished  Construction  Contracts 

Advances  and  partial  payments  on  contracts  are  charged 
to  this  account.     When  contracts  are  completed  this  account 
is  credited  and  the  proper  accounts  of  Groups  I,  II,  and  III 
are  charged  with  the  total  cost  of  the  contracts. 
T^T,  Supervision  and  Engineering  at  Mine 

34  Salaries  and  Expenses — General  Office 

35  Taxes 

36  Revenues  Incident  to  Construction 

37  Interest  During  Construction 

38  Insurance 

39  General  Expenditures 

Investment  in  Tenant  Buildings  and  Camp 

The  accounts  in  this  classification  are  designated  to  show  in 
detail  the  investment  in  tenant  buildings  and  camp  property. 
In  the  aggregate,  they  should  be  in  agreement  with  the  balance 
in   the  controlling  balance  sheet  account  203.     They  are  as 

follows: 

Number  Title 

43  Streets,  Parking,  and  Sidewalks 

44  Water  Supply  and  Sewerage 


BITUMINOUS  COAL  MINE  ACCOUNTING  I51 

45  Town  Lighting 

46  Tenant  Dwelling  and  Appurtenant  Structures 

47  Hotels  and  Boarding  Houses 

48  Other  Non-Mining  Structures  (Classified) 

49  Miscellaneous  Camp  Property  (Classified) 

Property  Retired  and  Replaced,  and  Property  Abandoned 

When  a  major  item  of  property  or  equipment,  such  as  a  shop, 
part  of  the  power  plant,  machinery,  building,  etc.,  is  retired  from 
service  and  replaced  with  property  serving  like  purpose,  the  fixed 
asset  account  should  be  charged  with  the  cost  of  the  new  property 
and  credited  with  the  following: 

1 .  Any  amounts  realized  from  the  sale  of  the  scrap  or  salvage 

of  the  replaced  property,  less  the  cost  of  disposing  of 
this  scrap  and  of  demolishing  the  property. 

2.  The  depreciation  on  the  replaced  property  which  has  been 

accrued.     The  corresponding  debit  for  this  amount 
should  be  made  to  the  depreciation  reserve  account. 

3.  The   difference  between   the   total   of   the   above   two 

amounts  and  the  value  at  which  the  retired  property 
was  carried  on  the  books. 

The  amount  of  (3)  should  be  charged  to  current  expense  unless 
it  is  thought  advisable  because  of  the  large  amount  involved  to 
charge  it  direct  to  Profit  and  Loss,  or  to  Deferred  Debits,  together 
with  the  cost  of  demolishing  the  property,  if  that  cost  exceeds 
any  realization  made  from  the  scrap  or  salvage.  This  procedure, 
in  so  far  as  it  is  applicable,  applies  also  to  any  abandoned 
property. 

If  the  property  retired  and  replaced  is  of  minor  importance, 
and  is  replaced  in  kind  without  betterment,  the  cost  of  replace- 
ment in  excess  of  depreciation  accrued  plus  any  returns  from 
salvage,  should  be  charged  to  maintenance  expense,  and  no 
adjustment  should  be  made  in  the  investment  accounts. 

If  the  property  abandoned  is  of  minor  importance,  the  proper 


152  ACCOUNTING— THEORY  AND  PRACTICE 

investment  account  should  be  credited  with  the  amount  at  which 
the  asset  is  carried  on  the  books  and  the  loss  through  abandon- 
ment, over  and  above  the  depreciation  accrued  plus  the  value  of 
salvage  materials,  should  be  charged  to  maintenance  expense. 

In  the  last  two  cases  reserve  for  depreciation  is  charged  with 
the  amount  of  depreciation  accrued  to  date  of  replacement,  and 
Materials  account  209  with  the  salvaged  material. 

Income  Revenue  and  Expense  Accounts 

Income  accounts  are  as  follows: 

Number  Title 

55  Coal  Sales 

Subdivided  on  the  general  ledger  into: 

55  (a)  Sales — Coal  Produced 
55  (b)  Sales — Coal  Purchased 

55  (c)  Sales — Retail  at  Mine 

56  Charges  to  Coal  Sales 

Subdivided  on  the  general  ledger  into: 

56  (a)  Coal  Purchased 

56  (b)  Allowances  and  Adjustments 

Allowances  are  sometimes  charged  direct  to 
Sales. 

57  Coal  Inventory — Debit  or  Credit 

This  account  is  to  be  credited  with  the  value  at  cost  of  the 
coal  produced  during  the  month  but  held  in  storage  and 
charged  with  the  cost  value  of  the  coal  sold  from  storage, 
Account  211  (a)  being  credited. 

58  Miscellaneous  Income 

The  subdivisions  under  this  general  heading  show  the  net 
income  derived  from  "indirect  mining  properties"  and  "non- 
mining  properties,"  and  other  income  debits  and  credits. 
The  gross  income  from  each  class  of  property  or  activity  is 


BITUMINOUS  COAL  MINE  ACCOUNTING  1 53 

charged  with  the  expenses  incidental  thereto,  such  as  labor, 
supplies,  taxes,  insurance,  and  depreciation.  These  income 
accounts  are  as  follows : 

58  (a)  Dwellings  and  Camp 

(i)  Camp  Rentals 

(2)  Camp  Upkeep 
58  (b)  Mercantile  Operations — Net 
58  (c)  Farming  Operations — Net 
58  (d)  Coke  Plant  Operations — Net 
58  (e)  Washery  Operations — Net 
58  (f)    Royalties  Earned 
58  (g)  Interest  and  Discounts 

Further  subdivided  into : 

(i)  Purchase  Discounts 

(2)  Sales  Discounts 

(3)  Interest  on  Funds  and  Securities  Owned 

(4)  Interest  on  Current  Loans  and  Notes 

Payable 
58  (h)  Dividends  on  Stocks  Owned 
58  (i)    Commissions  on  Pay-Roll  Deductions 

58  (j)   Miscellaneous  Income 

59  Other  Charges 

Subdivided  as  follows: 

59  (a)  Interest  on  Long-Term  Debt 

59  (b)  Federal  Income  and  Profits  Taxes 

Other  General  Ledger  and  Subsidiary  Accounts 

The  titles  of  the  following  groups  of  accounts  are  the  general 
ledger  accounts  which  act  as  controlling  accounts  over  the  prim- 
ary accounts  set  forth  in  each  group.  The  primary  accounts  are 
summarized  in  subsidiary  records,  and  in  the  aggregate  must  be 
in  agreement  with  their  respective  controlling  general  ledger 
accounts. 


154  ACCOUNTING— THEORY  AND  PRACTICE 

I.  Operating  Revenues.  The  accounts  in  this  group,  which 
arise  out  of  activities  directly  connected  with  coal  mining 
operations,  are  as  follows: 

Number  Title 

63  Debit  or  Credit  from  Explosives  and  Supplies  Sold  to  Miners 

64  Revenue  from  Smithing 

Miners  are  customarily  charged  a  stated  amount  monthly 
for  blacksmith  services,  such  as  sharpening  picks. 

65  Revenue  from  Heat,  Light,  and  Power 

66  Miscellaneous  Debits  and  Credits  to  Operations 

II.  Operating  and  Maintenance  Expenses.  For  the  purpose 
of  the  cost  reports  the  charges  to  the  accounts  given  below  should 
be  recorded  so  as  to  draw  a  distinction  between  labor  and  suppHes. 
The  labor  of  unloading  materials  should  be  charged  as  a  part  of 
the  cost  of  such  material  to  the  proper  materials  accoimt  imder 
Account  209.  The  blacksmith  labor  of  making  tools  or  finished 
material  parts  for  material  stock  should  likewise  be  charged  to 
Materials.  The  blacksmith  labor  of  sharpening  tools,  drills, 
and  bits  should  be  charged  to  Supplies  under  the  proper  min- 
ing account  and  not  to  Labor.  All  services  rendered  the 
company  by  outside  firms  on  repair  work,  etc.,  even  though 
such  services  consist  exclusively  of  labor  should  be  charged  to 
Supplies. 

The  Operating  and  Maintenance  Expense  accounts  are  as 
follows: 

Number  Title 

-J  I  Mining 

7 1  (a)  Pick  Mining 

Payments  to  hand-miners  on  tonnage  basis. 
7 1  (b)  Machine  Mining 

Subdivided  as  desired,  for  instance: 
(i)  Cutting 
(2)  Drilling,  Shooting,  and  Loading 


BITUMINOUS  COAL  MINE  ACCOUNTING  155 

(3)  Allowances  (other  than  Narrow  Work) 
(i)  and  (2)  above  are  assumed  to  be  on 
a  tonnage  basis. 

71  (c)  Other  Mining 

Wages  paid  men  who  are  indirectly  engaged 
in  mining  but  whose  wages  are  not  on  a  tonnage 
basis,  such  as  powdermen,  or  other  indirect  min- 
ing labor  which  cannot  be  apportioned  accurately 
to  other  mining  accounts. 

71  (d)  Company  Coal 

Labor  of  "Company  Men"  and  supplies  used 
in  reclaiming  coal  dropped  along  entries  and 
haulage  ways.  The  word  "Company"  in  this 
account  is  the  term  used  in  mining  and  is  merely 
intended  to  distinguish  between  the  coal  pro- 
duced on  contract  by  miners  from  that  produced 
by  the  so-called  "Company  Men "  paid  on  other 
than  a  tonnage  or  contract  basis,  which  produc- 
tion is  obtained  from  a  house-cleaning  of  the 
mine,  so  to  speak.  In  this  discussion  it  is  con- 
sidered that  the  miners  are  paid  on  a  tonnage 
basis. 

71  (e)  Narrow  Work 

(i)  Pick  Mining 
(2)  Machine  Mining 

71  (f)    Machine  Repairs 

72  Timbering 

73  Ventilation — Operation  and  Maintenance 

74  Drainage — Operation  and  Maintenance 

75  Dead  Work 

75  (a)  Grading 

75  (b)  Removal  of  Slate  and  Waste 


156  ACCOUNTING— THEORY  AND  PRACTICE 

75  (c)  Driving  Entries 

Other  than  coal  entries.  For  entry  work 
through  coal  see  Account  71  (e). 

76  Haulage 

This  account  may  be  subdivided  to  show  haulage  costs 
"inside"  and  "outside."  If  it  is  possible  to  segregate  the 
laying  of  mine  track  extensions  from  track  maintenance,  a 
separate  account  may  be  provided  for  Track  Laying.  The 
subdivisions  are  as  follows: 

76  (a)  Haulage — Animal  Operation 

76  (b)  Haulage — Mechanical  Operation 

76  (c)  Haulage  Equipment — Maintenance 

77  Tipple— Operation  and  Maintenance 

77  (a)  Dumping  and  Loading 
77  (b)  Box  Car  Loading 

77  (c)  Screening  and  Preparation 

This  account  includes  ordinary  screening  and 
preparation  costs  of  bituminous  mining.  Wash- 
ery  operations  in  anthracite  mining  are  included 
under  income  accoimt,  Washery  Operations. 

78  Power — Operation  and  Maintenance 

The  National  Coal  Association  recommends  the  charging 
of  all  power  expenses  ujider  one  grouping  and  the  redistribu- 
tion of  such  costs  to  the  expenses  for  the  various  operating 
activities  consuming  power,  on  the  basis  of  power  consumed. 
This,  no  doubt,  is  correct  procedure  in  large  operations.  In 
small  mines  it  is  not  always  possible  to  do  so  and  even  if  the 
distribution  is  made  it  is  imnecessary.  It  would  be  better 
to  devote  attention  to  the  correct  distribution  of  labor  and 
supplies.     The  accounts  in  this  classification  are: 

78  (a)  Generating  Power 
78  (b)  Boiler  Fuel 


BITUMINOUS  COAL  MINE  ACCOUNTING  157 

78  (c)  Water 

78  (d)  Power  Equipment — Maintenance 

78  (e)  Power  Purchased 

79  Other  Operating  and  Maintenance  Expenses 

79  (a)  General  Inside  Labor  and  SuppHes 

79  (b)  General  Outside  Labor  and  Supplies 

80  Mine  Overhead 

80  (a)  Superintendence 
80  (b)  Engineering 

80  (c)  Mine  Office 

80  (d)  Maintenance  Mine  Structures 

80  (e)  Mine  Automobile 

80  (f)   Welfare  Work 

80  (g)  Accidents  and  Casualties 

80  (h)  Compensation  Insurance 

80  (i)    Insurance — General 

80  (j)   Miscellaneous 

III.  Fixed  Charges  to  Mining.  The  instructions  under  these 
accounts  present  one  view  of  how  to  compute  depletion,  develop- 
ment, amortization,  and  depreciation  charges.  The  various 
viewpoints  will  be  discussed  later. 

Number  Title 

81  Depletion 

The  charge  to  this  account  should  be  based  upon  the  ton- 
nage mined  and  so  computed  that  on  the  estimated  date  of 
the  exhaustion  of  the  mine  a  reserve  will  have  been  provided 
sufficient  to  equal  the  original  cost  of  the  coal  (or  its  fair 
market  value  ^.s  of  March  i,  19 13,  if  the  mine  was  operated 
prior  thereto) .  The  charge  in  any  month  is  to  be  determined 
by  using  a  fixed  rate  per  ton  for  the  tonnage  mined.  This 
rate  is  ascertained  by  dividing  the  original  cost,  or  fair  market 
value  as  of  March  i,  1 913,  of  the  tract,  deposit,  or  lease,  less 


158  ACCOUNTING— THEORY  AND  PRACTICE 

the  value  of  the  surface  at  the  time  of  the  acquisition  of  the 
property  (or,  in  latter  case,  as  of  March  i,  19 13),  by  the  re- 
coverable tonnage  estimated  at  the  date  of  the  purchase  (or  as 
of  March  i,  19 13).  If,  during  the  operation  of  the  mine,  it 
is  found  that  the  original  estimate  of  recoverable  tonnage  is 
in  error,  or  if  the  return  of  the  capital  would  be  unrea- 
sonably deferred  by  following  the  above  rule  literally  (say 
100  years),'  an  adjusted  ton  rate  for  depletion  should  be 
used. 

82  Development  Amortized 

The  charges  to  this  account  are  determined  as  follows: 
Divide  Development  account  at  the  end  of  the  year  (less 
deductions  for  depreciation  of  development  to  the  beginning 
of  the  year)  by  the  estimated  tons  of  coal  in  the  ground  at 
the  beginning  of  the  year  to  be  recovered  through  such  de- 
velopment. The  result  from  such  computation  will  be  the 
rate  per  ton  for  the  year.  Multiply  the  number  of  tons  pro- 
duced during  the  year  by  this  rate  to  determine  the  amount 
to  be  charged  to  this  account,  and  credited  to  Accrued 
Depreciation  of  Development  for  the  year. 

83  Depreciation 

The  subaccounts  hereunder  should  include  a  monthly 
charge  which,  during  the  service  life  of  the  structures  or 
equipment  charged  to  investment  will  provide  a  reserve  suffi- 
cient to  equal  the  original  cost,  less  salvage.  This  rule  may 
be  applied  to  mine  structures  and  equipment,  considered 
in  groups  rather  than  by  individual  units,  in  order  to  avoid 
accounting  refinements. 

83  (a)  Depreciation  of  Structures 

83  (b)  Depreciation  of  Equipment 

To  avoid  fluctuations  in  the  monthly  costs 
per  ton,  the  known  or  estimated  annual  depre- 
ciation charges  (based  on  estimated  life)  should 


'  K«e  "  Income  Tax  Procedure,  1920"  by  Montgomery,  pages  776  to  779. 


BITUMINOUS  COAL  MINE  ACCOUNTING  159 

be  divided  by  the  estimated  production  for 
the  year  and  depreciation  should  be  accrued 
monthly  on  the  basis  of  the  tons  produced. 
These  accounts  should  be  charged  with  an 
amount  equal  to  the  number  of  tons  produced 
multiplied  by  the  tonnage  rate  thus  deter- 
mined, adjusting  any  differences  at  the  end  of 
the  year. 

84  Royalty — Current 

If  the  royalty  payment  is  calculated  on  the  actual  ton- 
nage of  coal  mined  during  the  period,  such  payment  is  to  be 
charged  to  Royalty — Current. 

If  the  royalty  agreement  provides,  as  above,  that  the 
royalty  payment  shall  be  calculated  on  the  actual  tonnage 
mined  during  a  stipulated  period,  but  stipulates  further  that 
if  the  coal  mined  during  that  period  is  less  than  a  certain 
tonnage,  there  shall  be  paid  a  specified  minimum  amount  and 
that  the  amount  by  which  the  specified  minimum  sum  ex- 
ceeds the  payment  calculated  at  the  rate  agreed  on  for  the 
actual  tonnage  mined  shall  not  be  recoverable  nor  allowed  as 
an  advance  payment  on  coal  to  be  mined  in  the  future — 
when  such  stipulation  is  made,  the  minimum  royalty  should 
also  be  charged  to  Royalty — Current. 

Suppose  the  royalty  agreement,  while  requiring  payment 
for  a  minimum  tonnage  during  a  specified  period,  permits  the 
operator  to  mine  at  a  future  time,  without  further  payment  of 
royalty,  tonnage  equal  to  the  difference  between  the  specified 
minimum  paid  for  and  that  actually  mined.  If  less  than  the 
minimum  is  mined  there  should  be  charged  to  Royalty — 
Current  an  amount  equal  to  the  number  of  tons  mined  multi- 
plied by  the  royalty  rate  per  ton,  and  the  difference  between 
this  amount  and  the  minimum  payment  should  be  carried  to 
an  account  entitled  "Royalty  Advances."  If  more  than  the 
minimum  is  mined,  an  amount  equal  to  the  number  of  tons 


l6o  ACCOUNTING— THEORY  AND  PRACTICE 

mined  multiplied  by  the  royalty  rate  per  ton  should  be 
charged  to  Royalty — Current. 

In  the  case  mentioned  in  the  preceding  paragraph,  when 
the  actual  tonnage  mined  during  one  of  such  future  peri- 
ods exceeds  the  minimum  royalty  payment,  the  Royalty 
Advances  account  should  be  credited  with  the  amount  of 
such  excess. 

In  the  event  that  minimum  royalties  charged  to  Royalty 
Advances  are  of  such  large  amounts  as  to  preclude  the  possi- 
bility of  producing  enough  tonnage  to  recover  the  amount  on 
future  production,  then  such  amounts  as  cannot  be  recovered 
later  should  be  charged  to  Royalty— Current  during  the  year 
when  paid  or  when  such  fact  is  established. 

IV.  Selling  Expenses.    Accounts  in  this  group  are  as  follows: 

Number  Title 

85  Commissions 

86  Advertising 

87  Salesmen's  Salaries  and  Expenses 

88  Officers'  Salaries  and  Expenses 

89  Office  Salaries  and  Expenses 
go  Miscellaneous 

V.  General  Expenses  and  Administration.    This  classification 
includes  the  following  accounts : 

Number  Title 

91  Officers'  Salaries  and  Expenses 

92  Office  Salaries 

93  Office  Expenses 

94  Legal  Expense 

95  Uncollectible  Accounts 

96  Taxes 

97  Miscellaneous 


BITUMINOUS  COAL  MINE  ACCOUNTING  l6l 

II.  Special  Records 

Coal  Sales  Register 

The  principal  books  of  accounts  are  those  kept  by  every  cor- 
poration and  call  for  no  special  mention.  The  coal  sales  register 
and  pay-rolls  are  the  only  records  that  present  forms  in  any  way 
pecuHar  to  the  business. 

Where  coal  is  consigned  direct  to  its  destination  from  the 
mine  office,  a  convenient  form  of  sales  register  is  a  manifest  of 
billing,  illustrated  in  Form  i.  This  form,  if  sufficient  lines  are 
provided,  lists  all  railroad  cars  loaded  each  day  and  shows  the 
name  of  consignee,  destination,  routing,  car  number  and  initial, 
marked  tare,  actual  weights — gross,  tare,  and  net — size  of  coal, 
and  amount  of  freight  prepaid  for  each  car,  if  any.  When  re- 
ceived at  the  general  office,  the  prices  and  extensions  on  each  car 
are  entered  in  columns  provided  for  that  purpose  at  the  right- 
hand  side.  Sheets  are  numbered  and  carried  in  a  loose-leaf 
binder  until  the  end  of  the  year,  when  they  are  bound  for  per- 
manent record.  Invoices,  numbered  in  order,  are  made  out  in 
duplicate  from  information  shown  on  the  manifest.  The  original 
is  mailed  to  the  customer  and  the  dupHcate  is  kept  on  file  in 
numerical  order.  The  number  of  the  invoice  for  each  car  is 
shown  on  the  manifest. 

Postings  to  the  customers'  accounts  in  the  customers  ledger 
are  made  either  from  the  manifest  or  from  the  duplicate  invoices, 
preferably  the  latter,  the  invoice  number  being  recorded  in  the 
ledger  accounts.  At  the  end  of  the  month  the  total  charges  to 
customers,  shown  by  the  manifest  pages,  are  covered  by  journal 
entry  charging  Accounts  Receivable — Sales  Office  and  crediting 
Sales — Coal  Produced.  The  credits  to  coal  customers  during 
the  month  from  the  cash  book  are  likewise  handled  as  individual 
credits  to  customers'  accounts  in  the  accounts  receivable  ledger 
and  as  a  credit  in  the  aggregate  to  Accounts  Receivable — Sales 
Office  control  account.  Credits  other  than  cash,  if  handled  as 
charges  against  Sales,  may  be  summarized  with  the  charges  on 


1 62 


ACCOUNTING— THEORY  AND  PRACTICE 


1                                                                                              THE  COLONY 

"j                         •                                         Daily  Report  of  Shipments  from   THE  DINES  MINE   No. 

■z 

Our 
Order 

No. 

SALESMAN 

CONSIGNEE 

DESTINATION 

„';;:,•,■•. tine 

Via 

Kind 
of 
Car 

Car 
>'uniber 

Initial 

Cap. 
acltj 

jMark 
Tare 

1 

1 

2 

3 

—n- 

\ 

5 

G 

-i 

7 

P 

9 

10 

P 

11 







L^ ' 

12 



„j. 

— 

1 1 

■     ■ — 



r« 

] 

1 1 

~" 

T] 

« 

43 

44 

45 

4C 

47 

48 

49 

M) 

■/ 

Do  Nut  Foil  Tht«  .MHtiir«st- 

TOTALS 

<■ 

N".    Fiiu-*)   C..r*  •«  Tra.k        B-.x          PkkJi        Ootxlnlas 

1 

H 

Ml  Cart  Loaded  u>  S|»«oe  CaiMrity 

u 

Ml  Open  C.n  L<»ded  lo  Full  VUUe  Cqatil; 

c: 

^, 

C: 





-. 

Form  I.     Coal 


the  manifest  sheets.  Otherwise  they  are  handled  by  special 
journal  entries.  The  above  entries  contemplate  the  operation 
of  the  customary  controlling  account  in  combination  with  the 
subsidiary  accounts  receivable  ledger. 

Pay-Roil  Sheet 

The  pay-rolls  and  their  distribution  are  made  at  the  mine 
office.  In  some  cases  impression  copies  are  kept  for  mine  office 
record  while  the  original  rolls  are  forwarded  to  the  general  office 
for  the  checking  of  extensions  and  deductions  and  the  writing  of 
pay  checks.  The  pay  checks  are  then  returned  to  the  mine  office 
for  distribution.  In  other  cases,  the  rolls  are  audited  and  the 
checks  written  at  the  mine  office  and  the  rolls  are  sent  to  the 
general  office  after  pay  day.  Some  companies  pay  in  cash,  send- 
ing out  si)ecial  paymasters  from  the  general  office  for  this  purpose. 

The  pay-roll  sheets,  as  illustrated  in  Form  2,  are  usually  made 


BITUMINOUS  COAL  MINE  ACCOUNTING 


163 


MANIFEST  No.                                       1 

CUAli   L-uiuriViM  1 

Via  THE    UNION  PACIFIC   R.R.   CO.                 .             192.....   (THESE  columns  for  USE  OF  DENVER  OFFICE) 

ACTUAL 

NET  WEIGHTS 

FREIGHT  PAID 

A.MOUNT 

LT.«e».A.     1 

Gross 

Tsre 

Lun.p 

Grate 

Nut 

Slack 

M.K. 

Rate 

Amount 

Ck«<l 

Price 

Lump 

Nut 

Orate 

Slack 

M.R. 

No. 

No. 

1 

2 

3 

4 

5 

6 

7 

8 

9 

lU 

11 

1 



L 

__ 

u 

1 

, 

12 

p-n 

1-1 

1 

p 

r- 

- 

^~ 

~ 





42 

43 

44 

45 

4« 

47 

48 

4» 

50 

NOT  NEOOTHBLE 
This  «h;pmriit  'd  trodmd  nod  received  sobjert  to  the  terms  and  i-otiilitious  of  this 
Compw^-s  Udirorm  Bai  oT  Udiag.    AU  raixlitioi.  to  the  coau.r,  barrio  we  niaelled. 

<  Month' •  T<»uin  on  MuirM  to  I 

>—                                                                                                                                         T,f                                                                         '      '       1 

) 

As<..l  f«  K  E.  Co.                                                                Grnrral  MaoJW-. 

1 

Sales  Register 


to  fit  a  loose-leaf  binder  and  later  bound  permanently.  The  pay- 
roll period  is  usually  semimonthly.  However,  the  pay-roll 
distribution  furnished  at  the  end  of  the  month  covers  both  pay- 
roll periods  for  the  month. 

Deductions  are  made  on  the  pay-roll  from  the  employees' 
earnings  for  powder,  fuse,  and  other  supplies,  for  house  rent, 
light,  doctor,  hospital  fees,  union  dues,  store  bills,  coupon  books 
or  scrip  received  for  the  purchase  of  merchandise  at  the  company 
store,  for  coal,  insurance  premiums,  etc.  So  many  deductions 
are  made  that  this  side  of  the  pay-roll  causes  as  much,  if  not  more, 
work  than  the  earnings  side. 

The  daily  tally  sheet  received  by  the  mine  clerk  from  the 
weigh  boss  is  the  source  of  entry  for  the  earnings  of  miners  paid  on 
a  tonnage  basis.  Time  rolls  showing  the  class  of  employees  and 
nature  of  work  performed  are  the  source  of  entry  for  the  earnings 
of  Company  Men.     A  weekly  or  semimonthly  report  furnished 


1 64  ACCOUNTING— THEORY  AND  PRACTICE 


PkkoNo. 

PAY  ROLL 

MINE 

1 

1 

Check 
Xu. 

1 

J6 

9 

17 

18 

4 

19 

b 

2f> 

6 
21 

7 
22 

8 
S3 

9 
24 

111 
85 

11 

20 

12 
27 

13 

28 

14 

29 

16 
30 

31 

Totri 

MINING            1 

Ton» 

N 

vtmouDt  i 

L J 

: 


Form  2.     (a)  Pay- 


Correc 

n 

E»y  RoU  Clerk 

1 

SxpeiiDteDdenl 
Ciilnulntlnna,  Rates  nnii  Extenslnnm  O.nrrunt- 

1 

Auditor                                                                                          1 

'   '        " 1 

Tolil 
Deduct  louB 

Overdrawn 

NAME  AND  OCCUPATION 

Check 

No. 

Balance 
to  Paj 

Bank  Checks 
or  Remarks 

1 

^«'°« 

Board 

Rent  j 

■"" 

~ 

1 

— 

:i 

4 

] 

. 1 

. 1 



, 

_ 

, 1 

, 

^ 

r^ 

'— 

= ~~        —  • — '    ~    — : 

=^^ 

— :: 



- 

- 

==^ 

=1 

19 

ill 

-J 

, 

■ 

"■ 

~ 

" 

~ 

~ 

— 

- 





Form  2.     (b)  Pay- 


BITUMINOUS  COAL  MINE  ACCOUNTING  1 65 


WAT,F                              192 

XARHOW   WORK 

BOTTOM  LABOR 

TOP  LABOR 

CA-MP  LABOR 

SUPT.  A.VD  MISC. 

Total 
Eirningt 

Lira 
No. 

Vd..iE.t. 

Amount 

C* 

^'^' 

^'- 

Amount 

j/ 

♦■■ 

**^ 

Amount 

/kV^ 

Amount 

B.t> 

Amount 

~ 

1 

2 

3 

4 

1 

, 1 

1 

1 

i 

1 

1 

L_ 

. 

i 

1 1 

— 1 

1 J 

1 



1 

1 



_ 

■    ' 

"^ 

— 

" 

~ 

" 

"~ 

"^ 

18 

Id 

20 

,._ 

" 

~ 

' 



1 

Roll  Sheet  {face) 


EaireNo. 

DEDICTIO.NS                                                                                                                                               \ 

Doctor 

Smith- 
ing 

Te«m 
Coil 

Light 

Toiletl 

In- 

L'.M. 
W.A. 

I'dn 
Check 

POWER 

SCRIP 

Time 
Checit 

Time     n 
Check 
Amount    1 

No. 

Amount 

Vo 

Amount 



^ 

— — r-1 

"~           p                             1                                                                               ill 

-^_ 

^___--_ 

■ 

., 

■~ 

~ 

~ 

~ 

r 



~ 

L 

RoU  Sheet  {reverse) 


I66  ACCOUNTING— THEORY  AND  PRACTICE 

by  the  mine  engineer  or  mine  foreman  is  the  source  of  entry  for 
"Narrow  Work"  and  other  special  allowances  to  miners  not 
reported  on  the  daily  time  rolls. 

The  Mine  Account  Books 

It  will  be  noted  from  the  journal  entries  to  follow  that  the 
system  herein  described  calls  for  the  keeping  of  some  principal 
record  books,  such,  for  instance,  as  a  cash  receipts  book,  both  at 
the  mine  office  and  at  the  general  office.  A  convenient  form  for 
the  mine  records  and  one  that  affords  a  better  means  of  checking 
the  mine  office  work  than  a  monthly  summary  of  distributions 
compiled  from  the  ordinary  form  of  record  book,  is  a  duplicating 
columnar  record.  This  record  is  arranged  with  an  original  and 
duplicate  sheet  for  each  page.  The  original  is  perforated  at  the 
left  margin.  A  carbon  sheet  is  placed  between  the  original  and 
duplicate  sheets  and  entries  are  made  on  the  original  with  in- 
delible pencil.  At  the  end  of  the  month  the  columns  are  totaled 
and  the  original  sheets  are  torn  from  the  book  and  forwarded  to 
the  general  office  to  support  the  journal  entry  on  the  general 
journal.  The  duplicate  sheets  bound  in  the  book  comprise  the 
mine  office  record. 

III.  Peculiar  Problems  in  Coal  Mine  Accounting 

Important  Question  in  Coal  Mining  Accounting 

In  this  short  chapter  it  is  not  possible  to  cover  thoroughly  all 
the  mooted  questions  concerning  coal  mine  accounting.^  The 
most  important  of  these  questions  are: 


'  The  interested  student  of  the  subject  should  not  fail  to  secure  from  the  secretary  of  the 
National  Coal  Association,  Commercial  Bank  Building,  Washington,  D.  C,  a  copy  of  the 
"Report  and  Suggestions  of  Committee  on  Standard  System  of  Accounting  and  Analysis  of 
Cost  of  Production,"  submitted  at  the  annual  meeting  of  the  Association  in  Chicago,  May 
21,  22,  2,5,  1910.  He  should  also  ask  the  Secretary  of  the  Association  for  a  copy  of  "Bill  of 
Complaint  and  Affidavits  in  Support  of  Application  for  Temporary  Injunction, "  filed  March 
10,  ii)20,  in  the  Supreme  Court  of  the  District  of  Columbia  in  the  case  of  the  Maynard  Coal 
Company  vs.  Federal  Trade  Commission.  The  General  Policies  Committee  of  the  anthracite 
industry  has  worked  out  a  unified  method  of  cost  accounting  and  this  should  be  obtainable 
through  the  National  Coal  Association.  The  student  should  also  obtain  from  the  secretary 
of  th('  Federal  Trade  Cornmission  at  Washington  copies  of  their  accounting  forms  and  in- 
striK  tions  issued  to  coal  mine  operators.  The  two  bodies  are  not  yet  in  agreement  on  several 
phases  <>{  e^oal  nine  accounting  and  their  arguments  serve  to  bring  out  forcibly  the  real 
problems  of  accounting  in  this  business. 


BITUMINOUS  COAL  MINE  ACCOUNTING  167 

1.  What  is  the  correct  method  of  computing  depletion  of  the 
coal  deposits  and  depreciation  of  development  and  physical 
improvements? 

2.  What  distinction  should  be  made  between  capital  and 
operating  expenditures? 

3.  Should  current  costs  include  charges  which  will  make 
reasonable  provision  for  possible  losses  through  catastrophes  in 
this  hazardous  business? 

4.  Is  the  cost  of  coal  used  by  the  operator  for  his  own  con- 
sumption a  charge  against  cost  of  production  and,  if  so,  how  will 
cost  of  such  fuel  be  computed? 

5.  Should  the  operating  expense  accounts  be  segregated  so 
as  to  maintain  a  distinction  between  maintenance  and  operating 
costs  of  each  mining  activity? 

6.  Should  the  net  income  or  loss  from  mine  camps  be  recorded 
as  separate  and  independent  operations  from  that  of  mining  coal, 
or  should  such  costs  and  credits  be  included  with  the  operating 
expense  and  revenue  accounts  in  computing  the  cost  of  mining 
coal? 

These  questions  will  be  considered  briefly. 

I.  (a)  Methods  of  Computing  Depletion 

The  method  of  depletion  set  forth  under  Account  81  is  in 
agreement  with  the  ideas  of  the  National  Coal  Association.  It 
differs  from  the  plan  of  the  Federal  Trade  Commission  in  respect 
to  permitting  revaluation  of  the  mine  as  of  March  i,  1913.  The 
National  Coal  Association  is  endeavoring  to  conform  its  methods 
with  the  Treasury  Department  regulations  in  reference  to  income 
and  profits  taxes,  and  also  to  protect  itself  in  respect  to  ascertain- 
ing the  correct  cost  of  producing  coal.  The  Federal  Trade 
Commission's  efforts  have  been  toward  finding  out  cost  and 
selling  prices  of  coal. 

The  Treasury  Department  permits  revaluation  as  of  March 
1, 1913,  because,  it  is  stated,  appreciation  prior  to  that  date  repre- 
sents income,  and  if  revaluations  for  subsequent  depletion  and 


I68  ACCOUNTING— THEORY  AND  PRACTICE 

depreciation  charges  were  not  permitted,  the  result  would  be 
taxation  of  income  accrued  during  a  period  when  an  income  tax 
law  was  unconstitutional.  The  members  of  the  Federal  Trade 
Commission  state,  in  efifect:  "We  are  not  concerned  with  income 
taxes  but  with  costs  and  no  revaluations  will  be  allowed." 

The  writer  thinks  the  stand  is  well  taken  by  the  Federal 
Trade  Commission  in  respect  to  depreciating  items  and  does  not 
agree  with  the  National  Coal  Association  that  two  complete  sets 
of  records  are  necessary;  the  one  to  record  depreciation  costs, 
without  revaluations,  and  the  other  to  compute  such  costs  on  the 
basis  of  revaluations  for  income  tax  purposes. 

Depreciation  costs  represent  the  reimbursement,  out  of  cur- 
rent income,  of  an  amount  to  offset  money  out  of  pocket,  not 
otherwise  charged  as  a  cost  against  such  income.  Any  value 
present  in  physical  assets  over  the  amount  out  of  pocket  therefore 
is  due  either  to  their  increased  value  as  a  whole  or  to  the  higher 
cost  of  replacement. 

As  the  value  of  the  whole  is  greater  than  the  siun  of  values  of 
its  component  parts,  because  these  have  been  welded  into  an 
operating  organism,  it  follows  that,  stripped  of  their  connections 
and  relations  with  each  other,  this  additional  value  would  not  be 
present  in  the  component  parts.  With  a  going  concern  the  parts 
may  wear  out  and  be  replaced  without  detracting  from  such 
additional  value.  Therefore  it  is  felt  that  such  value  should  not 
be  an  item  subject  to  depreciation,  assuming  that  it  were  possible 
to  calculate  it. 

As  to  depreciation  based  on  replacement  value,  most  au- 
thorities are  agreed  that  such  is  not  a  true  basis  on  which  to  com- 
I)ute  cost  of  current  production.  However,  the  prudent  operator 
may  make  provision  for  higher  replacement  costs  by  creating  a 
surplus  reserve  out  of  current  undivided  profits. 

Depletion  on  the  basis  of  revaluation  is  another  question.  The 
mining  business  is  speculative.  An  operator  buys  coal  land 
knowing  very  little  about  what  he  is  getting.  Suppose  he  buys 
a  property  in  1910  for  $50,000,  develops  it  and  before  March  i, 


BITUMINOUS  COAL  MINE  ACCOUNTING  1 69 

1913,  finds  that  his  mine  is  worth  $1,000,000,  which  value  should 
he  use  for  depletion,  the  first  or  second?  The  additional  value 
thus  discovered  has  always  been  considered  one  of  the  recom- 
penses to  the  mine-owner,  and  therefore  when  the  value  has  been 
once  established  he  should  be  permitted  thereafter  to  charge 
depletion  on  such  revaluation  figure.  The  writer  goes  further 
than  the  National  Coal  Association  and  believes  that,  for  the 
purpose  of  cost-finding,  revaluations  of  the  mine  should  be  made 
at  stated  regular  periods.  When  a  value  is  established  in  excess 
of  cost  due  to  discovery  of  better  or  larger  quantities  of  deposits, 
such  value  should  be  used  as  the  depletion  basis,  but  the  basis 
should  not  be  less  than  the  original  cost  to  the  present  owner. 

Many  views  have  been  expressed  in  regard  to  depletion. 
Some  favor  allowing  for  interest  on  the  value  of  deposits.  Some 
argue  for  a  decreasing  rate  throughout  the  life  of  the  mine  on  the 
assumption  that  the  operator  has  really  paid  more  for  the  coal 
taken  out  during  the  earlier  years  of  production.  Some  say  no 
depletion  should  be  charged  until  there  occurs  a  shrinkage  in 
value  of  the  mining  property  as  a  whole  below  its  cost  or  original 
commercial  value. 

I.  (b)  Amortizing  Development  Costs 

The  method  of  amortizing  development  costs  given  under 
Account  82  is  in  accordance  with  Article  210  of  Treasury  Depart- 
ment Regulations  45  relating  to  the  income  and  profits  taxes 
under  the  Revenue  Act  of  1918. 

In  respect  to  handling  of  development  costs  in  reports  to  the 
Federal  Trade  Commission  the  instructions  read: 

For  the  purpose  of  reports  made  to  the  Commission,  develop- 
ment is  defined  to  cover  only  the  main  shaft,  slope  or  planes,  and 
the  main  tunnel  or  entry  which  must  at  all  times  during  the  opera- 
tion of  the  mine  be  left  open  for  the  purpose  of  providing  a  mine 
gangway  or  haulage  way,  to  be  used  untU  the  total  tonnage  of  coal 
has  been  extracted.  All  cross  entries,  rooms,  etc.,  should  be 
treated  as  charges  against  operations.   The  statement  prepared  in 


170  ACCOUNTING— THEORY  AND  PRACTICE 

connection  with  this  account  should  show  (i)  the  actuzil  cost  of 
sinking  the  shaft,  slope  or  plane,  and  the  main  tunnel  with  its 
accompanying  air  courses  and  drainage  facilities,  and  (2)  the  esti- 
mated number  of  tons  of  coal  in  the  property  at  the  time  of  acqui- 
sition. 

In  respect  to  the  method  of  depreciating  or  amortizing  the  de- 
velopment costs  carried  as  an  asset  or  deferred  charge,  the  Federal 
Trade  Commission  instructions  under  the  operating  account, 
Amortization  Development,  read: 

The  per  ton  rate  for  this  account  shall  be  obtained  by  dividing 
the  cost  to  the  present  owner  of  driving  the  main  tunnel,  shaft, 
slope  or  drift,  plus  the  estimated  cost  of  the  number  of  feet  of 
main  tunnel  to  be  driven,  by  the  estimated  tonnage  recoverable 
through  such  development.  The  charge  to  this  account  in  any 
month  shall  be  determined  by  multiplying  the  tonnage  obtained 
through  this  development  by  the  per  ton  rate. 

The  National  Coal  Association,  in  their  committee  report 
(referred  to  later),  recommends  that  charges  to  capital  for  de- 
velopment costs  cease  when  the  mine  has  been  developed  to  its 
planned  output  capacity.  It  states  that  thereafter  there  will  be 
few  if  any  permissible  charges  to  that  account. 

All  authorities  are  agreed  that  development  costs  should  be 
confined  to  main  entries,  but  it  will  be  noted  that  the  National 
Coal  Association  says  that  after  the  mine  has  been  developed  to 
its  planned  output  even  such  charges  should  cease  and  future 
costs  be  charged  to  operations.  The  Federal  Trade  Cormnission 
rulings  differ  from  the  National  Coal  Association  recommenda- 
tions in  that  the  former  anticipate  future  development  costs  by 
estimating  such  costs  in  advance  of  actual  expenditure  and 
distribute  the  cost  to  operating  expenses  on  the  basis  of  tons 
produced  at  a  rate  per  ton  determined  by  dividing  the  total 
estimated  cost  of  development  by  the  estimated  recoverable 
tonnage  through  such  development. 

Attempts  are  made  under  some  methods  to  localize  certain 
portions  of  the  development  costs  to  the  coal  produced  from 


BITUMINOUS  COAL  MINE  ACCOUNTING  171 

certain  sections  of  the  mine.  If  any  material  differences  exist  it 
may  be  proper  to  make  such  distinctions  at  times,  but  in  most 
cases  development  costs  may  be  accounted  for  more  practically, 
and  with  sufficient  accuracy,  without  separation  into  parts. 
The  Federal  Trade  Commission  method  is  objectionable  because 
it  anticipates  costs  by  means  of  estimates.  Furthermore,  in 
view  of  Article  222  of  Regulations  45,  it  would  seem  that  the 
National  Coal  Association  is  more  in  harmony  with  the  Treasury 
Department  than  the  Federal  Trade  Commission  as  to  the  proper 
method  to  be  used.  In  the  opinion  of  the  writer  the  method  sug- 
gested by  Article  210  of  Regulations  45,  above  referred  to,  is  the 
best  method  from  an  accounting  viewpoint  for  general  application. 
This  method  as  compared  with  the  Federal  Trade  Commission 
method  may  be  shown  best  by  the  illustration  given  below.  The 
life  of  the  mine  and  size  of  figures  used  in  the  illustration  are 
intentionally  reduced  to  nominal  amounts  for  the  sake  of  clear- 
ness. Life  of  the  mine  is  assumed  to  be  3  years.  Development 
costs  generally  will  be  largest  during  the  first  or  development 
years  of  the  mine,  and  thereafter  decrease  in  amount  each  year. 
We  shall  assume  development  costs  to  be  $5  in  the  first  year  of 
operation,  $3  in  the  second  year,  and  $2  in  the  third  year;  the 
estimated  quantity  of  recoverable  coal  to  be  20  tons;  and  the  rate 
of  production  for  the  first  year  to  be  5  tons,  for  the  second  year  5 
tons,  and  for  the  third  year  10  tons. 

Years  of  Operation 
First      Second     Third 

1.  Amount  invested  beginning  of  year None      $3-75     $  4-So 

2.  Development  charges  during  year $  5.00         3.00        2.00 

3.  Total,  (i)  plus  (2) $5.00       $6.75    $6.50 

4.  Estimated  tons  in  ground  beginning  of  year. .       20  15            10 

5.  Rate  per  ton $     .25  $     .45  $    .65 

6.  Production  during  year — tons 5  5            10 

7.  Development  amortized  during  year $  1.25  $  2.25  $  6.50 

8.  Investment  balance  forward  to  next  year. . .  $  3.75  $  4.50  None 

9.  Estimated  tons  in  ground  end  of  year 15  10  None 


172  ACCOUNTING— THEORY  AND  PRACTICE 

The  method  requested  by  Federal  Trade  Commission  is  as 
follows : 

Years  of  Operation 
First      Second     Third 

1.  Development  charges  first  year $5.00 

2.  Estimated  cost  subsequent  development.  .  .         5.00 

3.  Total,  (i)  plus  (2) $10.00 

4.  Estimated  tons  recoverable 20 

5.  Rate  per  ton  each  year $    .50  $     .50  $     .50 

6.  Production  during  year — tons 5              5  10 

7.  Development  amortized $  2.50  $  2.50  $  5.00 

The  illustration,  of  course,  is  not  true  to  all  cases  for  we  have 
assumed  our  estimate  of  future  development  costs  to  be  in  agree- 
ment with  actual  costs.  It  will  serve,  however,  to  illustrate  the 
two  methods. 

It  will  be  noted  that  the  Federal  Trade  Commission  method 
effects  a  higher  charge  against  the  first  two  years.  Such  dis- 
tribution is  not  true  to  fact,  for  it  is  accomplished  by  charging 
against  present  production  a  portion  of  the  cost  of  developing 
the  main  entries  to  serve  future  production.  The  development  of 
main  entries  used  by  present  production  will  also  serve  future  pro- 
duction, and  future  production  should  bear  its  proportion  of  such 
costs;  but  the  converse  is  not  true.  The  cost  of  production  in- 
creases with  the  depth  of  workings,  and  the  first  method  reflects 
current  costs  more  accurately.  The  method  indorsed  by  the 
National  Coal  Association  would  cause  all  development  costs  in- 
curred after  the  mine  had  reached  a  normal  output  to  be  charged 
to  operations  of  the  year  in  which  they  were  incurred.  This 
would  have  an  effect  similar  to  that  of  the  Federal  Trade  Com- 
mission method,  namely,  the  production  of  a  given  year  would 
be  burdened  with  its  share  of  the  development  costs,  plus  a 
portion  of  that  appHcable  to  future  production,  and  production 
of  a  later  year  would  be  relieved  of  its  just  proportion  of  such 
costs. 


BITUMINOUS  COAL  MINE  ACCOUNTING  173 

In  favor  of  the  Federal  Trade  Commission  method  the 
following  arguments  are  advanced: 

Costs  of  mining  increase  with  depth  of  workings  and  unless 
present  production  is  made  to  share  a  portion  of  costs  applicable 
to  future  production,  the  time  will  arrive  when  further  extraction 
of  coal  cannot  be  made  without  loss  to  the  mine  operator  and 
consequently  he  must  stop  operations.  In  that  event  the  un- 
mined  coal  will  be  an  economic  loss  to  society.  It  is  also  con- 
tended that  the  basic  value  of  development  for  depreciation 
charges  is  the  cost  of  aU  development  in  relation  to  all  production 
and  not  merely  a  portion  of  the  completed  mine  development  in 
relation  to  a  portion  of  the  production.  The  writer  thinks  that 
considerations  of  practicability  should  govern. 

I.  (c)  Depreciation  Rates  and  Methods 

The  method  of  depreciation  given  under  Account  83  conforms 
more  with  the  instructions  of  the  Federal  Trade  Commission 
than  with  those  of  the  National  Coal  Association.  Both  methods 
(described  hereafter)  conform  with  the  Treasury  Department 
regulations  and  may  be  applied  with  equal  propriety,  so  far  as 
customary  practice  is  concerned,  to  suit  individual  conditions. 
The  method  given  under  Account  83,  in  conjunction  with  pre- 
liminary instructions,  set  forth  under  "Investment  in  Mine 
Plant  and  Equipment  Accounts,"  is  an  attempt  to  combine  the 
two  ideas. 

In  general  there  are  two  methods  of  depreciation  widely  used, 
and  a  discussion  of  these  two  methods  is  sufiEicient  to  bring  out 
the  special  problems  of  depreciation  as  applied  to  coal  mining. 
One  is  the  commonly  known  "straight-line  method,"  under  which 
the  service  life  of  each  asset  is  reckoned,  and  the  loss  of  value  for 
each  year  determined  by  dividing  the  original  cost  of  the  asset 
by  the  number  of  years  or  periods  in  the  service  life.  Under 
this  method,  if  the  cost  of  depreciating  property  is  unchanged, 
the  charges  for  each  period  will  be  equal  regardless  of  the  amount 
of  coal  extracted. 


174  ACCOUNTING— THEORY  AND  PRACTICE 

The  following  is  a  table  of  depreciation  rates  obtained  from 
the  Department  of  Natural  Resources  under  the  Commissioner 
of  Internal  Revenue: 

Depreciation  Rates — Coal  Mines 
Kind  of  Equipment  Estimated  Life  in  Various  Districts* 

#1        #2  #3  #4        #5        #6 
Tipple : 

Frame Life  of  Property 

Steel Life  of  Property 

Head  Frame Life  of  Property 

Power  Plant 7           7  7  7           7           7 

Motors 10         10  10  10         10         10 

Pumps 5         10  7  5           7           7 

Mine  Cars 4           4  4  4           4           4 

Mules,  Horses 4          4  4  4          4          4 

Cables  and  Haulage 2           2  2  2           2           2 

Electric  Equipment 7         10  7  5         10           7 

Houses:  Brick,  Frame,  Concrete,.  Life  of  Property 

Hand-Tools i           i  i  i           i           i 

Mining  Machines 7          8  7  5          8          8 

Timbers Life  of  Property  6  6  6         10 

Rails 5         10  8  5         10         10 

Wire  and  Trolleys 7         10  7  5         10           7 

Locomotives 10         10  10  10         10         10 

Bee  Hive  Ovens 10  10  10         10         10 

By-Product  Ovens 12  15  15         15         15 

Washeries Life  of  Property 

*  I  Anthracite;  2  Pennsylvania  Bituminous,  West  Virginia,  Illinois;  3  Kentucky, 
Tennessee.  Cieorgia,  Ohio,  Indiana;  4  Missouri,  Kansas,  Iowa,  Arkansas,  Oklahoma,  Ala- 
laii  a;  s  Texas.  North  and  South  Dakota;  6  Wyoming,  Montana,  Colorado,  New  Mexico, 
Utah,  and  Washington. 

The  other  method  is  a  combination  of  the  composite  and 
output  methods.  It  is  "composite,"  in  that  depreciation  is 
calculated  on  the  plant  as  a  whole.  It  is  ''output,"  in  that  the 
I^lant  life  is  based  on  the  total  estimated  production.  The 
rate  of  charge-off  is  determined  by  dividing  the  whole  plant 
in\estment  by  the  estimated  recoverable  tonnage  of  coal.  The 
number  of  tons  produced  periodically  multiplied  by  the  rate 
equals  the  amount  of  depreciation  accrued  for  the  period.     Under 


BITUMINOUS  COAL  MINE  ACCOUNTING  1 75 

this  method  the  amount  of  periodical  depreciation  charges  is  in 
proportion  to  the  tonnage  of  coal  extracted. 

The  Federal  Trade  Commission  instructions  read : 

In  all  cases  depreciation  of  structures  and  equipment  installed 
for  the  purpose  of  operating  the  mine  is  to  be  based  upon  the 
actual  cost,  less  salvage  value.  It  should  not  be  prorated  on  a 
tonnage  basis,  but  should  be  put  on  a  percentage  basis  based 
on  the  estimated  service  life  of  the  buildings  or  equipment.  The 
amount  of  each  yearly  charge  should  be  divided  by  twelve  to  ar- 
rive at  a  monthly  figure  which  should  be  entered  for  structures 
and  equipment  separately. 

The  National  Coal  Association  argues  at  length  in  favor  of  the 
output  method,  and  their  committee's  "Preliminary  Considera- 
tions" on  this  subject  are  as  follows: 

Before  discussing  the  details  of  an  accounting  system,  it  is 
useful  to  emphasize  the  fundamental  truth  that  every  coal  mine 
consists  of  owned  or  leased  coal  deposits,  plant,  equipment  and 
development. 

In  the  case  of  some  mines,  the  greater  cost  will  be  the  coal;  in 
another,  the  equipment;  and  the  cost  of  development  will  be, 
more  or  less,  according  to  the  physical  conditions  of  each  opera- 
tion, but  all  these  elements  make  a  coal  mine,  and  when  the 
operating  stage  is  reached  their  combined  value  as  a  mine  is 
greater  than  the  sum  of  their  separate  costs. 

They  all  depreciate  together  as  the  coal  is  exhausted,  for  when 
the  coal  is  gone,  or  the  right  to  the  coal  has  elapsed,  the  plant 
and  equipment  have  little  or  no  value  and  the  development  is  lost. 

Capital  investment  in  a  coal  mine  is  not  a  permanent  asset; 
it  is  only  an  outlay  preliminary  to  the  extraction  of  the  coal;  it  is 
merely  an  advanced  or  deferred  charge  upon  future  income, 
which  capital,  if  recovered,  at  all,  must  be  recovered  with  the  cur- 
rent expenses  of  operation  out  of  the  proceeds  of  coal  sold. 

By  dividing  the  cost  of  the  mine  by  the  total  number  of  tons 
practically  recoverable  through  present  shafts  and  openings,  the 
rate  per  ton  necessary  to  redeem  such  cost  will  be  found. 

In  Coal  Mining  the  exact  unit  for  the  measurement  of  work 
done  is  the  ton  o"f  coal  mined.  It  is  also  the  exact  unit  for  measur- 
ing depletion  of  mineral,  wear  and  tear  from  use  of  equipment, 


176  ACCOUNTING— THEORY  AND  PRACTICE 

and  exhaustion  of  development.  Development  is  a  mere  ease- 
ment, the  value  of  which  disappears  when  the  coal  is  gone. 

A  coal  mine  being,  as  emphasized,  made  up  of  several  ele- 
ments, all  depreciating  as  the  coal  is  mined,  such  depreciation 
is  composite,  accruing  at  a  rate  concurrent  with  the  rate  of  ex- 
traction. The  necessary  rate  per  ton  being  determined,  the  aggre- 
gate depreciation  for  any  accounting  period  should,  of  course, 
as  far  as  practicable,  be  distributed  among  the  various  elements 
in  proportion  to  their  respective  costs  or  value. 

The  doctrine  that  measures  depreciation  of  coal  mine  plant 
and  equipment  in  terms  of  time  (excepting,  of  course,  some  lease- 
hold propositions)  is  fallacious,  as  tested  by  the  further  assertion 
that  a  completely  equipped  mine  could  be  maintained  indefinitely 
without  depletion  or  wear  and  tear  if  no  coal  were  mined,  by 
minor  repairs. 

Therefore,  we  insist,  as  a  general  rule — excepting  some 
leaseholds — that  the  correct  measure  of  the  depletion  and  de- 
preciation experienced  in  mining  coal  is  the  ton  of  coal  mined. 

After  a  coal  mine  has  been  developed  and  equipped  to  its 
planned  output  capacity,  charges  to  its  Capital  Account  should 
cease,  and  thereafter  there  will  be  few  if  any  permissible  charges 
to  that  account. 

Usually  after  one-third  or  one-half  the  life  of  the  mine  has 
elapsed,  from  time  to  time  thereafter  additions  to  power  plant  and 
major  items  of  equipment  will  be  necessary,  and  the  Cost  thereof 
should  be  set  up  in  appropriate  Additions  and  Betterment  Ac- 
counts. For  these  an  additional  and  separate  depreciation  rate 
based  on  the  remaining  coal  or  life  of  the  mine  will  have  to  be 
established. 

At  the  end  of  each  month,  Operating  Account  should  be 
charged,  and  Depreciation  credited  with  an  amount  equivalent  to 
the  depreciation  rate  multiplied  by  the  number  of  tons  mined 
during  the  month.  At  the  end  of  the  year  Depreciation  should  be 
charged  with  the  year's  accumulation  and  the  respective  elements 
of  the  mine  written  off  in  proper  proportion.   .    .    . 

In  the  case  of  mines  operated  under  lease,  ...  if  the  life 
of  the  lease  is  shorter  than  the  probable  period  required  to  get 
all  the  coal  the  monthly  charge  to  Operating  Account  and  cor- 
responding credit  to  Depreciation  should  be  such  proportion 
of  the  cost  of  the  mine  as  one  month  is  of  the  remaining  term  of 
the  lease. 


BITUMINOUS  COAL  MINE  ACCOUNTING  1 77 

2.  Distinction  Between  Capital  and  Operating  Expenditures 

For  making  this  distinction  the  National  Coal  Association 
contends  for  the  method  shown  (page  148)  under  subdivision  III, 
Equipment,  under  "Investment  in  Mine  Plant  and  Equipment 
Accounts"  in  the  accounting  classification.  (See  also  answer  to 
Question  i  for  their  views.)  Any  system.,  of  course,  is  subject  to 
abuse,  but  to  those  turning  from  the  customary  method  to  that 
herein  set  forth,  which  is  in  agreement  with  the  National  Coal 
Association  and  the  Treasury  Department  regulations,  it  may 
appear  that  the  bars  are  down  and  they  can  determine  for  them- 
selves what  should  and  what  should  not  be  charged  to  capital. 
This  is  true  because  the  point  of  departure  from  the  customary 
method  rests  on  the  determination  of  the  exact  time  when 
the  mine  reaches  normal  capacity.  In  practice  this  is  a  very 
difficult  problem. 

3.  Current  Costs  and  Charges  Against  Possible  Catastrophes 

The  Treasury  Department  decides  this  question  for  all  busi- 
nesses by  the  decisive  and  unequivocal  answer— ^" No."  In 
the  foregoing  accounts  no  such  provision  was  made.  The 
Federal  Trade  Commission  will  not  permit  such  a  charge. 
However,  to  quote  W.  B.  Reed,  Secretary  of  the  National 
Coal  Association,  writing  in  the  Coal  Review  of  September  29, 
1920: 

No  insurance  company  will  insure  against  the  hazard  of  mine 
fires,  explosions  or  the  cave  in  of  the  surface.  Practically  the 
entire  value  in  a  coal  mine  may  be  wiped  out  by  an  explosion  or 
some  other  catastrophe.  .  .  .  For  this  reason  the  operator  should 
set  up  as  an  item  of  current  cost  an  amount  per  ton  which  will 
reasonably  insure  against  such  a  catastrophe.  If  this  were  a  com- 
mercially insurable  item  it  would  be  treated  as  an  item  of  legiti- 
mate expense,  not  only  on  the  standpoint  of  cost,  but  also  as  an 
item  properly  deductible  under  the  income  tax  laws.  Even 
though  it  is  not  so  permitted  by  the  Internal  Revenue  Bureau, 
and  although  the  operator  must  pay  taxes  upon  such  an  item,  he 
should  nevertheless  make  provision  for  it  in  his  accounting, 
-VOL.  m — 12 


178  ACCOUNTING— THEORY  AND  PRACTICE 

and   in   any   governmental  price-fixing  a   reasonable  amount 
should  be  allowed  for  such  contingencies. 

4.  Cost  of  Coal  Consumed  by  Operator  as  Related  to  Cost  of 
Production 

The  National  Coal  Association  committee  report  says,  con- 
cerning the  question  of  charging  cost  of  coal  used  by  the  operatoi 
to  cost  of  production : 

The  cost  of  coal  to  the  operator  for  his  own  consumption  is 
what  he  could  get  for  it  in  the  market.  If  an  unmerchantable 
product  is  used  under  the  boilers,  it  should  be  charged  at  its 
cost  of  production.  If  cost  of  fuel  is  not  included  in  cost  of  power, 
the  accounts  do  not  exhibit  true  cost.  The  true  cost  should  be 
before  the  operator  to  induce  him  to  estimate  the  possibilities  of 
effecting  savings  by  improving  his  plant  or  boiler  room  practice; 
also  to  estimate  the  possibility  of  effecting  economy  by  purchas- 
ing power  of  outside  service  companies  or  through  establishing 
central  power  plants.  The  tonnage  consumed  per  annum  under 
their  own  boilers  by  large  producers  is  very  large,  and  the  cost 
thereof  should  be  clearly  shown. 

The  Federal  Trade  Commission  instructions  are: 

The  commission  does  not  allow  the  inclusion  of  a  separate 
charge  for  power  house  fuel  in  operating  costs.  Such  a  separate 
charge  would  be  a  duplication,  since  the  cost  of  production  of  such 
coal  is  already  included  under  the  several  headings  of  Labor,  Sup- 
plies and  certain  Fixed  Charges. 

On  this  point  it  would  seem  the  Federal  Trade  Commission  is 
in  error.  Suppose  the  combined  cost  of  labor,  supplies,  and  fixed 
charges  in  producing  i  ton  of  coal  is  $2.50.  That  ton  of  coal, 
after  screening,  is  slack  coal.  Slack  coal  can  be  sold  for  $1.50 
per  ton.  But  it  must  be  used  for  boiler  fuel  and  the  company 
consequently  loses  $1 .50  by  diverting  it  to  such  use.  Or  suppose 
that  ton  of  coal  was  sold  for  $1.50  and  another  ton  purchased 
from  a  neighboring  mine  at  $1 .50.  In  the  latter  case  the  Federal 
Trade  Commission  probably  would  not  object  to  charging  the 
cost  of  fuel  to  production  costs.  Why  then  object  to  the  item 
when  the  coal  is  produced  by  the  consumer?     In  the  opinion  of 


BITUMINOUS  COAL  MINE  ACCOUNTING  179 

the  writer,  it  is  in  no  sense  a  duplication  of  cost  and  the  National 
Association  ruling  is  correct. 

5.  Segregation  of  Operating  Expense  Accounts 

The  National  Coal  Association  says  that  the  separating  of 
operating  expense  accounts  made  for  the  purpose  of  maintaining 
a  distinction  between  maintenance  and  operating  costs  of  each 
mining  activity,  is  not  customary  and  would,  in  many  cases,  be 
impracticable  without  the  addition  of  a  large  force  of  timekeepers 
and  supervisors. 

The  Federal  Trade  Commission  says : 

Operators  whose  pay  rolls,  cost  sheets  or  other  records 
segregate  these  accounts  (Maintenance  and  Repairs)  from  the 
general  operating  costs  are  required  to  report  such  expenditures 
separately.  Operators  who  find  it  impossible  or  impracticable  to 
segregate  such  items  may  report  them  under  the  heading  of 
Operating  Labor  and  Supplies. 

Nothing  impracticable  should  be  required  of  an  accoimting 
system.  In  most  cases,  it  would  therefore  seem  best  not  to  at- 
tempt a  distinction  in  such  cases.  For  instance,  a  pump  man 
may  both  operate  and  repair  pumps ;  trackmen  may  be  engaged 
both  in  laying  extensions  of  track  and  maintaining  existing 
tracks. 

6.  Net  Income  or  Loss  from  Mine  Camps 

On  the  question  of  whether  the  net  income  or  loss  from  mine 
camps  should  be  recorded  as  separate  and  independent  opera- 
tions from  that  of  mining  coal,  or  should  be  included  with  the 
operating  expense  and  revenue  accounts  to  compute  cost  of  min- 
ing coal,  Mr.  Reed,  Secretary  of  the  National  Coal  Association 
says: 

Under  the  accounting  practices  now  commonly  employed  by 
coal  mining  companies,  all  costs,  both  labor  and  supplies,  ex- 
pended in  maintaining  and  repairing  miners'  dwellings  as  well 
as  the  income  derived  therefrom  are  recorded  as  separate  and 
independent  operations.     The  instructions  prescribed  by  the 


l8o  ACCOUNTING— THEORY  AND  PRACTICE 

Commission  require  the  inclusion  of  these  expense  items  with 
all  other  labor  or  supply  costs  under  the  heading  of  maintenance 
and  repairs.  The  upkeep  of  miners'  dwellings  is  not  a  part  of  the 
direct  cost  of  mining,  but  the  net  loss  or  gain  of  such  dwellings 
may  be  a  proper  addition  to  or  deduction  from  the  total  cost. 
The  inclusion  of  these  expense  items  in  direct  operating  costs  is 
not  only  a  departure  from  the  accounting  practice  now  commonly 
employed,  but  is  also  incorrect  and  results  in  inaccurate  and  mis- 
leading information. 

IV.   Illustrative  Statements  and  Entries 

Statements  and  Entries 

To  illustrate  how  transactions  recorded  in  accordance  with 
the  foregoing  classification  of  accounts  would  appear  in  trial 
balances,  journal  entries,  and  monthly  cost  and  income  state- 
ments, there  are  set  forth  the  following  statements  and  entries, 
using  actual  figures.  It  should  be  noted  that  these  statements 
and  entries  are  to  be  used  for  problem  purposes  in  accordance 
with  instructions  to  follow. 

1.  Trial  balance  of  general  ledger,  after  closing,  as  of 
December  31,  1920. 

2.  Journal  entries  during  the  month  of  January,  192 1.  In 
practice,  some  of  the  entries  shown  are  entered  direct  to  the  ledger 
accounts  from  the  various  books  of  original  entry.  Some  com- 
panies, however,  journalize  all  entries  as  shown. 

3.  Trial  balance  of  the  general  ledger,  as  of  January  31,  192 1. 
The  general  ledger  closing  process  of  transferring  nominal  ac- 
counts to  Profit  and  Loss  occurs  only  at  the  close  of  the  fiscal 
period,  the  balance  in  Profit  and  Loss  after  transfer  of  nominal 
accounts  thereto  being  hkewise  transferred  to  surplus,  reserve 
accounts,  or  undivided  profits.  Therefore,  until  the  close  of  the 
fiscal  year  the  nominal  accounts,  accumulated  to  date,  are 
reflected  in  the  monthly  trial  balances. 

4.  Income  and  cost  statements  for  the  month  of  January, 
1921. 


BITUMINOUS  COAL  MINE  ACCOUNTING  l8l 

I.  The  trial  balance,  after  closing,  as  of  December  31,  1920, 
is  as  follows: 

Account 

Number  Title  Debit  Credit 

201  (a)  Coal  Lands $180,000.00 

202  Investment  in  Mine  Plant  and  Equip- 

ment        225,000.00 

203  Investment  in  Tenant  Buildings  and 

Camp 85,000.00 

204  Investment  in  Mercantile  Operations .  35,000.00 

205  Investment  in  Farm '.  25,000.00 

209         Materials  on  Hand 30,000.00 

212  (a)  Accounts  Receivable — Sales  Ofl&ce. .. .  100,000.00 

212  (b)  Accounts  Receivable — Mine  Office. ...  2,500.00 

212  (c)  Employees'  Overdrafts 1,500.00 

212  (d)  Accounts  Receivable — Miscellaneous.  6,500.00 

213  (a)  Accrued  Profits  Due  from  Collateral 

Operations 3,500.00 

213  (b)  Accrued  Interest  Receivable 1,200.00 

214  (a)  Notes  Receivable — Trade 7,100.00 

214  (b)  Notes  Receivable — Special 20,000.00 

217  (a)  First  National  Bank 22,000.00 

217  (b)  Citizens  National  Bank 10,000.00 

217  (f)  Cash  Working  Funds — General  Office.  125.00 

217  (g)  Cash  on  Hand — Mine  Office 100.00 

218  (a)  Organization  Expenses 2,000.00 

218  (c)  Insurance  Premiums  Paid  in  Advance.  1,120.00 

230  (b)  Mortgage  Notes $  60,000.00 

231  (a)  Pay-Roll 22,000.00 

231  (b)  Unclaimed  Wages 250.00 

231  (c)  Freight  Payable 500.00 

23 1  (d)  Vouchers 60,000.00 

232  (a)  Accrued  Taxes 2,000.00 

232  (b)  Accrued  Interest  Payable 600.00 

239  Reserve  for  Depletion 10,650.00 

240  (a)  Accrued  Depreciation — Development.  1,175.00 
240  (b)  Accrued  Depreciation — Structures....  4,000.00 
240  (c)  Accrued  Depreciation — Equipment...                               8,500.00 

240  (d)  Accrued  Depreciation — Camp 3,300.00 

241  (b)  Reserve  for  Uncollectible  Accounts ., .  4,000.00 


182 


ACCOUNTING— THEORY  AND  PRACTICE 


241  (c)  Reserve  for  Federal  Income  and  Profits 

Taxes 40,000.00 

241  (d)  Reserve  for  Contingencies 3,000.00 

242  Capital  Stock  Outstanding 500,000.00 

245  Undivided  Profits 37,670.00 

Totals $757,645.00  $757,645.00 


2.  The  journal  entries  during  month  of  January,  1921,  are  as 
follows : 


Account 

Number  Entry  No.  i  Debit  Credit 

217  (a)         First  National  Bank $90,080.00 

217  (h)        Cash  on  Hand — General  Office 545 -oo 

212  (a)  Accounts  Receivable — Sales  Office  $80,000.00 

212  (d)  Accounts       Receivable — Miscel- 

laneous   5,190.00 

213  (b)  Accrued  Interest  Receivable 1 10.00 

214(a)  Notes  Receivable — Trade 5,100.00 

>3i  (b)  Unclaimed  Wages loo.oo 

58  (g — 3)  Interest  on  Funds  and  Securities 

Owned 80.00 

58  (3)  Miscellaneous  Income 4S-oo 

Distribution  general  office 
cash  receipt  book.  Jan- 
uary, 192 1 

Entry  No.  2* 

23 1  (a)        Pay-Roll 45,000.00 

231  (c)         Freight  Payable* 1,500.00 

23 1  (d)        Vouchers 55,000.00 

217  (a)  First  National  Bank 56,350.00 

217  (b)  Citizens  National  Bank 45,000.00 

58  (g — i)  Purchase  Discounts 150.00 

Distribution  of  check  regis- 
ter, January,  1921. 

*  The  item  of  Freight  Payable.  Coal  is  customarily  sold  F.  O.  B.  mine,  but  when  con- 
signed  to  prepay  freight  stations  the  mine  operator  must  prepay  the  freight.  Such  items 
are  entered  on  the  "Manifest"  page  for  the  day,  (see  description  of  manifest  form  under 
"  Special  Records")  and  with  the  coal  are  invoiced  and  charged  therefrom  to  the  customer. 
From  the  manifest  these  items  are  credited  to  Freight  Payable  and  charges  to  this  latter 
aeeouni  are  n.ade  from  the  check  or  voucher  registers  when  paid. 


BITUMINOUS  COAL  MINE  ACCOUNTING  1 83 

Entry  No.  3 

209                Materials  on  Hand 10,000.00 

21-'  (d)        Accounts    Receivable  —  Miscellane- 
ous   125.00 

217  (_b)         Citizens  National  Bank 40,000.00 

218  (b)         Royalty  Advances 50.00 

58  (a — 2)  Camp  Upkeep 425.00 

Maintenance $353.60 

Compensation  In- 
surance          71-40 


[Operating    and    Maintenance    Ex- 
penses      $4,750.00] 

76  (c)         Haulage  Equipment — Maintenance.  1,830.00 

80  (a)        Superintendence 50.00 

80  (b)         Engineering 40.00 

80  (c)         Mine  Office 100.00 

80  (f)         Welfare  Work 350.00 

80  (h)        Compensation  Insurance 1,880.00 

80  (j)          Miscellaneous 500.00 


[Fixed  Charges $50.00] 

84  Royalty — Current 50.00 


[Selling  Expenses $2,240.00] 

85  Commissions 1,000.00 

86  Advertising 850.00 

87  Salesmen's  Salaries  and  Expenses.  .  .  140.00 

89  Office  Salaries  and  Expenses 150.00 

90  Miscellaneous 100.00 


[General  Expenses  and  Ad- 
ministration      $900.00] 

91               Officers' Salaries  and  Expenses 250.00 

93  Office  Expenses 500.00 

94  Legal  Expense 100.00 

97               Miscellaneous 50.00 


231  (d)  Vouchers 58,540.00 

Distribution  voucher  regis- 
ter, January,  1921. 


71 

(a) 

71 

(a) 

71 

(b) 

71 

(b) 

71 

(c) 

71 

(d) 

71 

(e) 

184  ACCOUNTING— THEORY  AND  PRACTICE 

Entry  No.  4 

211  (b)        Coal  in  Transit 250.00 

212  (a)         Accounts  Receivable — SalesOffice...       80,353.80 

231  (c)  Freight  Payable 1,400.00 

55  (a)  Sales — Coal  Produced 79,203.80 

Distribution  sales  register, 
January,  192 1. 

Entry  No.  5* 

[Operating  and  Mainte- 
nance Expenses . . .     $45,290.00] 

Pick  Mining — Labor 20,000.00 

Pick  Mining — Supplies 10.00 

Machine  Mining — Labor 2,115.00 

Machine  Mining — Supplies i5-oo 

Other  Mining — Labor 500.00 

Company  Coal — Labor 7S-oo 

Narrow  Work — Labor 1,600.00 

(i)  Pick  Mining $1,400.00 

(2)  Machine  Mining .. .  200.00 

71  (f)         Machine  Repairs — Labor 50.00 

72  Timbering — Labor 2,400.00 

73  Ventilation — Labor 450.00 

74  Drainage — Labor 47S-oo 

75  (b)        Removal  Slate  and  Waste — Labor. . .         1,000.00 

75  (c)         Driving  Entries — Labor 400.00 

76  (a)         Haulage — Animal  Operation — Labor        1,000.00 
76  (b)        Haulage — Mechanical     Operation — 

Labor 3,800.00 

76  (c)         Haulage    Equipment — Maintenance 

— Labor 2,500.00 

Dumping  and  Loading — Labor i  ,600.00 

Box  Car  Loading — Labor 200.00 

Screening  and  Preparation — Labor. . .  500.00 

Generating  Power — Labor 700.00 

*  Commissions  on  Pay-RoU  Deductions  cover  charges  to  outsiders  for  collection  of  items 
on  the  pay-roll  in  their  favor.  Should  a  charge  be  made  to  boarding  house  keepers,  in  lieu 
of  rent  fir  company  buildings,  based  on  a  percentage  of  pay-roll  board  collections,  such 
percentage  would  be  credited  to  Camp  Rentals  and  not  to  this  account. 

Citizens  National  Bank.  The  credit  to  this  account  is  for  time  checks  issued  at  the  mine 
office  drawn  on  a  bank  in  the  locality  of  the  mine.  The  amount  and  number  of  each  time 
check  is  posted  to  the  pay-roll.  All  time  checks  must  be  signed  and  countersigned  by  the 
chief  mine  clerk  and  the  mine  superintendent. 


77 

(a) 

77 

(b) 

77 

(c) 

78  (a) 

BITUMINOUS  COAL  MINE  ACCOUNTING  1 85 

78  (b)        Boiler  Fuel — Labor 150.00 

78  (d)        Power    Equipment — Maintenance — 

Labor 300.00 

79  (a)         General  Inside  Labor  and  Supplies — 

Labor 200.00 

79  (b)        General  Outside  Labor  and  Supplies 

— Labor 1,000.00 

80  (a)        Superintendence — Labor 3,000.00 

80  (b)        Engineering — Labor 350.00 

80  (c)         Mine  Office — Labor 500.00 

80  (d)        Maintenance — Mine       Structures — 

Labor 300.00 

80  (g)        Accidents  and  Casualties — Labor .  .  .  100.00 


58  (a — 2)  Camp  Upkeep — Maintenance 1,785.00 

55  (c)         Sales — Retail  at  Mine — Delivery  Ex- 
pense    50.00 

203  Investment  in  Tenant  Buildings  and 

Camp 350.00 

46  Tenant  Dwellings .  . .     $350.00 
Authority    #250 — Construc- 
tion   2     5 -room     houses: 
Nos.  525  and  526. 

209  Materials 20.00 

Handling  Props 
212  (b)        Accounts  Receivable — Mine  Office..  15.00 

212  (c)         Employees'  Overdrafts 750.00 

[Operating  Revenues $340.00! 

64  Revenue  from  Smithing 140.00 

65  Revenue  from    Heat,    Light, 

and  Power 200.00 

55  (c)  Sales — Retail  at  Mine 400.00 

58  (a — i)  Camp  Rentals 1,000.00 

58  (i)  Commissions    on   Pay-Roil 

Deductions  10.00 

209  Materials 1,800.00 

PowderandFuseTicketsSold 

212  (c)  Employees'  Overdrafts 650.00 

217  (b)  Citizens  National  Bank  (Time 

Checks)* 2,000.00 

*  Ibid. 


1 86       ACCOUNTING— THEORY  AND  PRACTICE 

231  (a)  Pay- Roll 42,060.00 

First  Half- 
Month  $23,000.00 

Second  Half- 
Month 19,060.00 

Distribution  of  pay-rolls  for 
the  month  of  January, 
1921. 

Entry  No.  6 

2og  Materials 200.00 

210  Freight  on  Materials 850.00 

212  (d)        Accounts  Receivable — Miscellaneous        1,000.00 
Company  Store 

231  (c)         Freight  Payable 300.00 

217  (b)  Citizens  National  Bank 2,350.00 

Distribution  mine  office 
check  register,*  January, 
1921. 

Entry  No.  7 

2og  Materials  on  Hand 600.00 

210  Freight  on  Materials 600.00 

Freight  on  Materials  into 
Materials  account,  Janu- 
ary, 1 92 1,  in  accordance 
with  material  report, 
Form  M2 

Entry  No.  8 
203  Investment  in  Tenant  Buildings  and 

Camp 400.00 

46  Tenant  Buildings $400.00 

Authority  #250 — Construc- 
tion 2  5-room  houses:  Nos. 
525  and  526. 

58  (a — 2)  Camp  Upkeep 500.00 

Maintenance 
[Operating  and   Mainte- 
nance Expenses $7,855.00] 

*  Memo  columns — debit  and  credit — on  this  form  show  time  checks  issued  in  amount 
shown  by  pay-roll  entry  No.  s. 


BITUMINOUS  COAL  MINE  ACCOUNTING  1 87 

Pick  Mining 12.50 

Machine  Mining 7.50 

Company  Coal 10.00 

Machine  Repairs 75-oo 

Timbering 1,350.00 

Ventilation 600.00 

Drainage 850.00 

Removal  of  Slate  and  Waste 150.00 

Driving  Entries 200.00 

Haulage — Animal  Operation 300.00 

Haulage — Mechanical  Operation ....  125.00 

Haulage  Equipment— Maintenance. .  2,670.00 

Dumping  and  Loading 225.00 

Box  Car  Loading 60.00 

Screening  and  Preparation 75-oo 

Generating  Power 85.00 

Power — Equipment  Maintenance...  525.00 
General    Inside    Labor    and    Sup- 
plies    300.00 

79  (b)      "  General    Outside    Labor    and    Sup- 

plies   90.00 

80  (d)        Maintenance  of  Structures 1 20.00 

80  (g)        Accidents  and  Casualties 25.00 


71 

(a) 

71 

(b) 

71 

(d) 

71 

(f) 

72 

73 

74 

75 

(b) 

75 

(c) 

76  (a) 

76  (b) 

76  (c) 

77 

(a) 

77 

(b) 

77 

(c) 

78  (a) 

78  (d) 

79 

(a) 

217 

(b) 

217 

(g) 

55 

(c) 

209 

210 

212 

(b) 

212 

(c) 

209  Materials  on  Hand 8j755.oo 

Distribution  materials  con- 
sumed in  company  use, 
January,  1921.  See  ma- 
terial Form  M3  and 
material  tickets  in  file. 

,  Entry  No.  9 

Citizens  National  Bank 1,600.00 

Cash  on  Hand — Mine  Office 30.00 

Coal  Sales — Retail  at  Mine .  . .  14.00 

Materials  on  Hand 35.00 

Freight  on  Materials  (Refund 

Overcharge) 25.00 

Accounts     Receivable — Mine 

Office 1,500.00 

Employees'  Overdrafts 40.00 


I88  ACCOUNTING— THEORY  AND  PRACTICE 

241  (b)                    Reserve  for  Uncollectible  Ac- 
counts    16.00 

Distribution  mine  office  cash 
receipt  book  January,  192 1. 

Entry  No.  10 
212  (b)        Accounts  Receivable  Mine  Office ... .  985.00 

Accounts  Receivable — 

Mine  Office $1 ,000.00 

Le55;  Pay-Roll  Charges  15.00 

55  (c)  Coal  Sales — Retail  at  Mine. . .  100.00 

58  (a — i)  Camp  Rentals • 500.00 

58  (a — 2)  Camp  Upkeep 3S-oo 

Maintenance 

65  Heat,  Light  and  Power 50.00 

Operating  Revenues 

209  Materials  on  Hand 300.00 

Distribution  mine  office  ac- 
counts receivable  register, 
January,  1921. 

Entry  No.  11* 
[Fixed  Charges $773-9o] 

81  Depletion 661.20 

82  Development  Amortized 112.70 

239  Reserve  for  Depletion 661.20 

240  (a)  Accrued  Depredation — Devel- 

opment   112.70 

Accrued    depreciation — de- 
velopment and  depletion 
reserve  for  January,  1921: 
22,040  tons  own 
production  at 
,03  for  deple- 
tion      $661.20 

22,540  tons  total 
production  at 
.005  for  de- 
preciation de- 
velopment ...       n  2 .  70 

*  Note  that  depletion  is  not  computed  on  that  portion  of  coal  mined  from  leased  land  ad- 
joining the  property  owned  in  fee.  It  is  assumed,  nowcver,  that  such  coal  is  reached  through 
openings  and  development  on  the  lands  owned. 


BITUMINOUS  COAL  MINE  ACCOUNTING  189 

Entry  No.  1 2 

[Fixed  Charges $1,577.80] 

83  (a)        Depreciation  of  Structures 394-45 

83  (b)        Depreciation  of  Equipment 1,183.35 

240  (b)                   Accrued  Depreciation — Struc- 
tures   394-45 

240  (c)                   Accrued  Depreciation — Equip- 
ment   1,183.3s 

Depreciation  mine  struc- 
tures and  equipment  for 
January,  192 1,  at  esti- 
mated rate  per  ton  for 
year,  .07.  (See schedule  of 
depreciation  on  file.)  De- 
preciation distributed  to 
Structures  and  Equip- 
ment in  ratio  of  the  in- 
vestments. 

Entry  No.  13 
63  Debit  or  Credit  from  Explosives,  etc. .  100.00 

Operating  Revenues 

209  Materials  on  hand 100.00 

Loss  from  powder  and  fuse  sold 
miners  during  January,  1 9  2 1 . 
(See  material  report  Mi.) 

Entry  No.  14* 

80  (i)         Insurance — General  (Supplies) 75-oo 

OperatiAg  and   Maintenance  Ex- 
penses 

58  (a — 2)  Camp  Upkeep 50.00 

Fire  Insurance 
218  (c)  Insurance  Premiums  Paid  in 

Advance 125.00 

Fire  insurance  premiums  ap- 
plicable to  expenses  for 
January,  1921.  (See  in- 
surance premium  expira- 
tion register.) 

*  It  is  assumed  here  that  insurance  premiums  when  paid  are  charged  to  the  deferred 
account  and  spread  over  the  life  of  the  policies  by  monthly  journal  entries,  from  which  the 
proper  proportionate  amounts  are  credited  to  the  deferred  account  and  charged  to  expenses. 


190  ACCOUNTING— THEORY  AND  PRACTICE 

Entry  No.  15 

96  Taxes 400.00 

General  Expenses  and  Administra- 
tration 

58  (a — 2)  Camp  Upkeep 100.00 

Taxes 

232  (a)  Accrued  Taxes 500.00 

Estimated  county  and  state 
property  taxes  for  Janu- 
ary, 1921. 

Entry  No.  16 

58  (a— 2)  Camp  Upkeep 283.33 

Depreciation 
240  (d)  Accrued  Depreciation — Camp  283.33 

Depreciation  of  camp  in- 
vestment as  of  January  i, 
1921,  on  basis  of  2s-year 
life.  1/12  of  4%  of 
$85,000. 

Entry  No.  1 7 

78  (b)         Boiler  Fuel  (Supplies) 900.00 

Operating  and  Maintenance  Expense 
55  (a)  Coal  Sales — Coal  Produced . .  900.00 

600  tons  slack  coal  sent  to 
boiler  house,  January, 
1 92 1.  (See  coal  produc- 
tion report.)  600  tons  at 
market  slack  price  of  $  1 .  50 
per  ton. 

Entry  No.  18 

213  (b)        Accrued  Interest  Receivable 120.00 

58  (g — 3)              Interest  on  Funds  and  Securi- 
ties Owned 120.0a 

Accrued  interest  on  notes 
receivable,  as  follows: 
Trade: 

John  Ward  & 
Co.:  $2,000  at 
6%— imo.   .     $   10 


BITUMINOUS  COAL  MINE  ACCOUNTING  19I 

W.  Benton  C.  & 

W.  Co.:  $4,- 

000  at  6% — 

}/7.  mo $  10 

Campaign  Coal 

Co.:  $1,000 — 

Without    in- 
terest    (paid 

January  10). 
Total  on  Trade 

Notes $  20 

Special: 
W.    B.    CokeU: 

$20,000  at  6% 

— I  month. . .       100 
Total     Interest 

Accrued $120 

Entry  No.  19 

213  (a)         ProfitsDuefromCoUateralOperations  40.00 

58  (c)         Farming  Operations 500.00 

58  (b)  Mercantile  Operations 540.00 

Estimated  profit  or  loss  from 
collateral  operations,  Jan- 
uary, 1921: 

Farm — Loss —     $500.00 
Mercantile  Opera- 
tions— Profit. .     540.00 

Entry  No.  20* 

95  Uncollectible  Accounts 250.00 

General  Expenses  and  Administra- 
tion 
241  (b)                    Reserve  for  Uncollectible  Ac- 
counts    250.00 

Reserve  for  uncollectible  ac- 
counts charged  to  ex- 
penses, January,  1921. 

*  The  reserve  for  bad  accounts  is  here  understood  to  cover  losses  not  only  on  sales  cus- 
tomers' accounts  but  also  on  all  other  accounts  receivable,  including  Employees  Overdrafts, 
Some  coal  companies  lose  considerable  sums  on  unpaid  overdrafts  of  so-called  "transient 
employees."  No  rule  of  estimate  is  here  prescribed  because  it  is  not  possible  to  do  so.  The 
conditions  in  each  case  will  suggest  a  reasonable  method  of  estimating  this  loss. 


192  ACCOUNTING— THEORY  AND  PRACTICE 

Entry  No.  21 
[Selling  Expenses $860.00] 

87  Salesmen's  Salaries  and  Expenses ...  .  260.00 

88  Officers' Salaries  and  Expenses 400.00 

89  Office  Salaries  and  Expenses 200.00 

[General  Expenses  and  Ad- 
ministration      $2,765.00] 

91  Officers' Salaries  and  Expenses 1,250.00 

92  Office  Salaries 1,015.00 

94  Legal  Expense 500.00 

231  (a)  Pay-Roll 3,625.00 

Distribution  general  office 
pay-roll,  January,  1921. 

Entry  No.  22 
59  (a)        Interest  on  Long-Term  Debt 300.00 

232  (b)  Accrued  Interest  Payable ... .  300.00 

Interest  accrued  on  mort- 
gage notes,  January,  1921. 
$60,000 — I  mo.  at  6%. 

Entry  No.  23 

59  (b)        Federal  Income  and  Profits  Taxes 870.77 

241  (c)  Reserve    for    Federal  Income 

and  Profits  Taxes 870.77 

Estimated  federal  income 
and  profits  taxes  appli- 
cable to  earnings  of  Janu- 
ary, 1921. 

3.  Tlie  trial  balance  of  tlie  general  ledger,  as  of  January  31, 
1 92 1,  is  as  follows: 

Trial  Balance,  January  31,  192 1 

A  ccmint 

Number  TiOe  Debit  Credit 

201  (a)         Coal  Lands $180,000.00 

202  Investment   in   Mine   Plant   and 

Equipment 225,000.00 

203  Investment  in  Tenant  Buildings 

and  Camp 85,750.00 


BITUMINOUS  COAL  MINE  ACCOUNTING  193 

204  Investment  in  Mercantile  Opera- 

tions           35,000.00 

205  Investment  in  Farms 25,000.00 

209  Materials  on  Hand 29,830.00 

210  Freight  on  Materials 225.00 

211  (b)         Coal  in  Transit 250.00 

212  (a)  Accounts  Receivable — Sales  Office  100,353.80 
212  (b)  Accounts  Receivable — Mine  Office  2,000.00 
212  (c)         Employees  Overdrafts 1,560.00 

212  (d)        Accounts      Receivable — Miscella- 

neous    2,435.00 

213  (a)        Accrued  Profits  Due  from  Collat- 

eral Operations 3,540.00 

213  (b)        Accrued  Interest  Receivable 1,210.00 

214  (a)        Notes  Receivable — Trade 2,000.00 

214  (b)        Notes  Receivable — Special 20,000.00 

217  (a)         First  National  Bank 55,730.00 

217  (b)         Citizens  National  Bank 2,250.00 

217  (f)  Cash     Working     Funds — General 

Office 125.00 

217  (g)         CashonHand — MineOffice.  .  .  . . .  130.00 

217  (h)        CashonHand — General  Office ... .  545 -cxj 

218  (a)        Organization  Expenses 2,000.00 

218  (c)        Insurance  Premiums — Paid  in  Ad- 
vance    995.00 

218  (b)  Royalty  Advances 50.00 

230  (b)  Mortgage  Notes 60,000.00 

231  (a)  Pay-Roll 22,685.00 

231  (b)  Unclaimed  Wages 350.00 

231  (c)  Freight  Payable 100,00 

231  (d)        Vouchers 63,540.00 

232  (a)        Accrued  Taxes 2,500.00 

232  (b)        Accrued  Interest  Payable 900.00 

239  Reserve  for  Depletion 11,311.20 

240  (a)        Accrued     Depreciation — Develop- 

ment    1,287.70 

240  (b)        Accrued  Depreciation — Structures  4,394.45 

240  (c)         Accrued  Depreciation  —  Equip- 

ment   9,683.35 

240(d)        Accrued  Depreciation — Camp 3,583.33 

241  (b)        Reserve  for  Uncollectible  Accounts  4,266.00 

,      VOL.  HI — 13 


194       ACCOUNTING— THEORY  AND  PRACTICE 

241   (c)         Reserve  for  Federal  Income  and 

Profits  Taxes 40,870.77 

241  (d)        Reserve  for  Contingencies 3,000.00 

242  Capital  Stock 500,000.00 

245  Undivided  Profits 37,670.00 

Operating  and  Maintenance  Ex- 
penses           58,870.00 

Operating  Revenues 290.00 

Fixed  Charges 2,401.70 

Selling  Expenses 3,100.00 

General  Expenses  and  Administra- 
tion   4,315-00 

55  (a)        Sales — Coal  Produced 80,103.80 

55  (c)         Sales — Retail  at  Mine 464.00 

58  (a — i)  Camp  Rentals 1,500.00 

58  (a — 2)  Camp  Upkeep 3,108.33 

58  (b)        Mercantile  Operations — Net 540.00 

58  (c)         Farming  Operations — Net 500.00 

58  (g — i)  Purchase  Discounts 150.00 

58  (g — 3)  Interest  on  Funds  and  Securities 

Owned 200.00 

58  (i)         Commissions  on  Pay-Roil  Deduc- 
tions    10.00 

58  (j)  Miscellaneous  Income 45-00 

59  (a)         Interest  on  Long-Term  Debt 300.00 

59  (b)        Federal    Income    and    Profits 

Taxes 870.77 


Totals $849,444.60  $849,444.60 


The  student  should  study  carefully  the  journal  entries  given 
above  and  trace  their  effect  on  the  opening  trial  balance.  One 
of  his  practice  problems  (see  Appendix  A,  v)  requires  that  he 
derive  the  trial  balance  of  January  3 1  from  that  of  December  3 1 
and  the  journal  entries  which  summarize  the  transactions  for 
the  month  of  January.  He  will  note  that  the  trial  balance  of 
January  31  is  an  "adjusted"  trial  balance  from  which,  therefore, 
the  regular  monthly  income  and  cost  statements  may  be  drawn 
up.     These  statements  follow. 


BITUMINOUS  COAL  MINE  ACCOUNTING 


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196  ACCOUNTING— THEORY  AND  PRACTICE 

Income  Statement — Analysis  of  Sales 

January,  192 1 

Sales — From  Production  and  Storage 


Kind 

Tons 

Average 
Realization 

Amount 

Lump 

4,500 

3,275 
2,838 
4,672 
200 
6,351 

$5.00 
5.00 

4-77 
1.50 
350 
300 

$22,500.00 

16,375.00 

13,567.80 

7,008.00 

700.00 

19,053.00 

Eee      

Nut 

Slack      

Mine  Run 

Railroad 

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21,836 
104 
600 

$3-627 
3-50 
1.50 

$79,203.80 
464.00 
900.00 

Mine  Retail 

Boiler  Fuel 

Total 

22,540 

$3-574 

$80,567.80 

This  schedule,  analysis  of  sales,  presents  the  detail  of  the 
sales  of  mined  coal  as  shown  in  the  income  statement  for  the 
month.  The  statistics  of  "average  realization"  are  secured  by 
dividing  the  sales  income  shown  in  the  Amount  column  by  the 
corresponding  item  in  the  Tons  column.  To  the  "  Coal  Shipped" 
are  added  the  coal  sold  retail  at  the  mine  and  that  sent  for 
consumption  in  the  power  plant.  It  will  be  noted  that,  in 
accordance  with  the  position  advocated  by  the  writer,  this  fuel 
is  charged  into  costs  at  a  fair  retail  price,  here  $1.50,  and,  of 
course,  treated  as  a  part  of  sales  income. 


BITUMINOUS  COAL  MINE  ACCOUNTING 


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CHAPTER  VI 

PRECIOUS  METAL  MINE  ACCOUNTING 
By  Reginald  Thomas 

General  Considerations 

Ore  mining  is  a  speculative  business  in  which  investors  risk 
their  money  with  the  hope  of  a  greater  return  than  can  be  ob- 
tained from  less  hazardous  enterprises.  Until  all  veins  within 
the  mine  limits  have  been  developed  it  is  impossible  to  determine 
accurately  the  profitableness  of  a  piece  of  mining  property. 
Metal  mining  profits  obviously  depend  upon  the  difference  be- 
tween the  cost  of  mining  and  smelting  the  ore  and  the  market 
price  of  the  metals  extracted  therefrom.  Since  costs  of  pro- 
duction vary  greatly,  it  is  of  vital  importance  at  the  inception  of 
operations  to  install  an  accounting  system  adequate  for  the  two 
main  purposes  of  ore  mining  accounting,  namely:  (i)  to  dis- 
tinguish accurately  between  expenditures  chargeable  to  mine 
development  and  those  chargeable  to  ore  production,  and  (2)  to 
allocate  expenditures  to  the  departments  of  work  in  which  they 
were  incurred. 

Mining  companies  operate  in  two  main  classes:  (i)  those 
which  own  their  mine  property  outright  in  fee  simple  or  ready 
for  United  States  Patent,  and  (2)  those  working  the  mine  under  a 
"lease  and  option."  The  status  of  the  first  class  is  well  under- 
stood. The  second  class  embraces  those  which  have  only  a 
limited  right  to  the  property  by  reason  of  holding  a  lease  and 
option  to  purchase.  The  company  has  full  possession  of  and  the 
right  to  operate  the  property  during  the  lease  period,  for  which  it 
usually  pays  to  the  owner  a  royalty  based  on  the  return  from 
each  shipment  of  ore  sold,  these  royalties  often  being  appHcable 

202 


PRECIOUS  METAL  MINE  ACCOUNTING  203 

to  the  specified  purchase  price  when,  and  if,  the  option  to  pur- 
chase is  exercised. 

Every  mining  property  has  its  own  peculiar  engineering  and 
development  problems,  but  withal  there  are  certain  fundamental 
features  common  to  all  properties.  Therefore  the  outline  of  the 
accounting  system  and  the  explanatory  matter  here  given  are  to 
be  considered  as  suggestive  of  a  plan  which  must  be  modified 
to  suit  the  requirements  of  each  particular  property.  The 
essential  thing  is  so  to  departmentize  the  work  and  distribute 
expenditures  for  labor,  supplies,  and  overhead  that  a  detailed 
report  may  be  readily  prepared  from  the  records  to  show  the 
results  of  operations.  The  accounting  methods  to  be  here  dis- 
cussed are  those  suitable  for  an  ore  mine  of  moderate  size.  It 
usually  happens  that  the  more  precious  metals  are  found  in  com- 
bination in  the  same  ore,  with  one  or  the  other  in  a  preponderant 
amount.  Ores  also  often  change  in  character  and  value,  es- 
pecially as  the  veins  are  developed  in  depth.  Therefore  the  sub- 
ject heading  of  this  chapter  refers  to  precious  metal  mining  in 
general  rather  than  specifically  to  gold,  silver,  lead,  or  tin  mining. 

Nature  of  Mining  Operations 

In  order  to  draw  the  line  of  demarcation  between  capital  and 
revenue  expenditures,  that  is,  between  mine  purchase  and  de- 
velopment and  ore  production,  some  general  idea  of  the  physical 
characteristics  of  the  mine  is  required.  Experience  has  shown 
that  it  is  usually  best  for  the  accountant  to  visit  the  mine  in 
person  and  familiarize  himself  with  the  surface  and  underground 
workings  in  company  with  the  mine  superintendent  or  foreman, 
so  as  to  obtain  at  least  a  general  idea  of  the  nature  of  the  work, 
the  objects  in  view,  and  the  methods  required  to  accomplish 
them. 

Ore  mining  may  be  regarded  as  a  continuous  process  produc- 
ing one  commodity  of  various  grades,  the  quality  of  which  cannot 
be  determined  until  after  the  completion  of  production.  There- 
fore, for  the  purpose  of  managerial  control  the  most  practical 


204  ACCOUNTING— THEORY  AND  PRACTICE 

plan  is  to  segregate  the  various  operations  in  the  accounts  so  that 
the  management  may  distinguish  between  development  and  ore- 
breaking  charges  in  connection  with  the  production  of  a  given 
quantity  of  ore. 

Experience  has  proved  that  for  accounting  purposes  it  is  best 
to  classify  mining  expenditures  as  to  kind  rather  than  as  to  place. 
"Mine  development,"  for  instance,  includes  such  operations  as 
sinking  the  shaft,  drifting,  i.e.,  making  horizontal  excavations, 
sinking  winzes,  i.e.,  exploratory  shafts,  and  doing  other  techni- 
cal development  work  in  a  great  number  of  places.  Likewise 
ore-breaking  includes  stoping,  i.e.,  cutting  ore  from  overhead 
or  on  the  floor  of  the  gallery,  drilling  and  blasting,  timbering, 
etc.,  wherever  they  occur. 

If  it  is  desired  to  know  from  what  part  of  the  mine  the  ore  is 
derived  and  the  cost  of  its  production,  this  information  may  be 
obtained  by  the  use  of  card  records  to  collect  the  expenditures 
for  labor  and  supplies  at  each  place  of  work.  In  conjunction 
with  such  records  it  would  also  be  necessary  to  keep  separate 
tallies  of  the  ore  production  of  the  different  mine  shafts,  of  the 
estimated  average  gross  assay  values,  etc.  Since  ore  is  usually 
drawn  from  a  number  of  places  to  make  up  car-lot  shipments  for 
the  smelters,  which  settle  for  each  car  as  a  separate  unit,  the 
separation  of  the  different  lots  of  ore  would  have  to  be  maintained 
up  to  the  point  of  shipment.  It  will  be  readily  seen  that  the 
segregation  of  expenditures  by  place  is  not  so  desirable  as  the 
proper  allocation  of  all  charges  incurred  in  producing  a  given 
quantity  of  ore,  unless  it  is  essential  to  compare  the  yield  of  ores 
extracted  from  different  parts  of  the  mine.  Such  comparisons, 
however,  can  usually  be  made  more  conveniently  by  means  of 
the  supplementary  card  records  referred  to  above.  These  are, 
of  course,  not  strictly  accurate. 

Selling  the  Ores 

The  higher  grades  of  crude  ore  are  usually  shipped  and  sold 
to  a  smelting  concern  equipped  to  handle  the  output  of  several 


PRECIOUS  METAL  MINE  ACCOUNTING  205 

mines.  The  lower  grades  of  crude  ores,  which  when  broken  con- 
tain a  considerable  portion  of  rock,  are  sold  to  "  custom  concen- 
trating" mills,  unless  mining  operations  are  on  a  scale  big  enough 
to  warrant  the  mining  company  itself  investing  in  a  reduction  and 
breaking  plant.  Such  a  plant  extracts  the  principal  ore  values 
by  crushing  and  concentrating  the  powdered  rock,  and  these 
concentrates  are  then  shipped  to  the  smelters  like  the  higher 
grades  of  crude  ore. 

As  has  been  stated  before,  ores  vary  greatly  in  character.  It 
sometimes  happens  that  an  ore  is  free-milling,  so  that  it  can  be 
crushed  and  the  values  extracted  by  amalgamation,  i.e.,  by  pass- 
ing the  crushed  ore  over  tables  covered  with  quicksilver,  which 
attracts  the  precious  metals.  The  quicksilver  is  then  scraped 
off  and  placed  in  a  retort,  and  since  this  metal  quickly  volatihzes 
at  a  relatively  low  temperature,  the  precious  metals  are  in  this 
way  extracted  and  made  into  bars  or  ingots  ready  for  sale.  As  a 
rule,  however,  few  ores  are  sufficiently  pure  and  rich  to  be  treated 
in  this  way  and  the  precious  metals  mUst  be  extracted  by  smelt- 
ing. In  the  process  of  smelting  it  is  impossible  to  recover  all  the 
metal  from  the  ore,  causing  losses  which  vary  considerably  with 
ores  of  different  character. 

An  ore  can  seldom  be  smelted  without  first  combining  it  with 
other  ores  of  different  composition  containing  the  fluxes  required 
for  the  process  of  smelting.  Therefore  smelters  usually  have  a 
sUding  scale  for  treatment  charges,  which  must  be  determined 
before  the  value  of  a  given  ore  shipment  can  be  ascertained.  In 
selling  crude  ores  to  the  smelter  the  basis  used  for  estimating  the 
value  of  the  ore  is  the  price  of  the  refined  metal  at  a  financial 
center,  such  as  New  York  or  London.  Penalties  are  imposed  for 
the  presence  of  undesirable  elements  in  the  ore,  since  crude  values 
extracted  by  the  smelter  must  go  through  additional  refining 
processes  before  they  reach  the  market  as  pure  metal.  To  arrive 
at  the  net  value  of  the  ore,  the  procedure  is  to  assay  a  fair  aver- 
age sample  of  each  car-lot.  Because  of  this  practice,  so  far  as 
possible,    ores   are   graded   and   shipped   separately.    Smelter 


206  ACCOUNTING— THEORY  AND  PRACTICE 

charges  for  treatment  are  based  upon  the  dry  weight  and  the 
value  per  ton  of  the  ore.  As  there  is  always  a  certain  percentage 
of  moisture  present,  the  smelter  first  weighs  and  samples  the  ship- 
ment, then  dries  the  sample,  and  in  this  way  estimates  the  per- 
centage of  moisture  present.  The  result  is  taken  as  indicative  of 
the  moisture  percentage  in  the  entire  car-lot.  After  the  ore  has 
been  treated,  the  smelter  makes  up  a  statement,  called  the 
"settlement  sheet,"  showing  the  results  of  the  smelting  process, 
deducts  the  charges — including  freight  charges,  as  noted  below — 
from  the  value  of  the  invoiced  ore,  and  sends  a  check  to  the 
shipper  for  the  balance  due. 

To  insure  equitable  treatment  and  a  fair  settlement,  mining 
companies  usually  engage  the  services  of  a  professional  "ship- 
per's agent,"  who  meets  the  car  at  the  smelter  and  checks  the 
weights,  the  assays,  and  deductions  claimed  by  the  smelter. 
Should  his  findings  show  any  discrepancies  with  those  submitted 
on  the  smelter's  settlement  sheet,  the  work  is  repeated  by  both 
parties.  In  the  event  of  a  continued  disagreement,  it  is  custom- 
ary to  call  in  an  umpire  of  unquestioned  integrity  whose  decision 
is  usually  accepted  as  final. 

Freight  rates  on  ore  shipped  vary  greatly  in  different  dis- 
tricts. They  are  usually  based  on  the  gross  value  of  the  ore, 
as  determined  at  the  smelter,  and  the  distance  it  was  hauled, 
upon  the  assumption  that  the  railroad  takes  greater  risks  when 
hauling  ores  of  higher  values.  Freight  charges  are  never  prepaid, 
because  the  railroad  awaits  the  result  of  the  smelter's  settlement 
and  accepts  the  value  per  ton  shown  therein  as  the  basis  for  its 
freight  rate.  The  smelter  withholds  the  freight  charge  at  the 
time  of  the  settlement  and  pays  it  directly  to  the  railroad. 

Office  Organization 

Although  a  mining  enterprise  sometimes  undertakes  the  con- 
struction and  operation  of  crushing  mills  and  smelters,  and  pos- 
sibly of  a  short  railroad  or  tramway  and  a  general  merchandise 
store,  for  the  sake  of  simplicity  the  discussion  is  here  confined  to 


PRECIOUS  METAL  MINE  ACCOUNTING  207 

the  accounting  for  mining  operations  only.  As  mines  are  usually 
located  in  mountainous  districts  more  or  less  remote  from  civili- 
zation, the  general  office  and  the  headquarters  of  the  management 
are  often  located  at  the  nearest  business  center.  At  the  general 
office  are  kept  the  following  books  of  account  and  records: 
general  cash  book,  general  voucher  register,  general  journal,  de- 
tail ledger  and  general  ledger,  stock  certificate  books,  stock  trans- 
fer records,  stock  ledgers,  minute  books,  etc.  The  general  ledger, 
in  conformity  with  accounting  practice,  contains  the  controlling 
accounts,  the  details  of  which  are  in  the  subsidiary  ledgers. 

The  mine  office  is  in  charge  of  the  mine  superintendent  who 
is  usually  a  technical  man  with  some  business  experience,  for 
among  his  duties  are  the  selection  of  heads  for  the  various  depart- 
ments of  work,  the  local  purchase  of  suppHes  currently  used, 
responsibility  for  operating  costs  and  production,  and  such  local 
business  arrangements  as  are  not  of  sufficient  importance  to  be 
referred  to  the  general  office  for  decision.  He  sends  to  the  general 
office  each  month  reports  covering  the  month's  operations,  from 
which  summary  totals  are  prepared  for  posting  to  the  general 
ledger.  At  the  mine  office  are  kept  the  local  cash  book,  local 
voucher  register,  local  journal,  local  detail  ledger,  and  local 
general  ledger,  beside  assay  records,  ore  shipment  records,  en- 
gineering data,  etc.  The  mine  office  in  its  local  general  ledger 
uses  control  accounts,  but  these  differ  from  those  at  the  general 
office  in  that  the  general  office  control  accounts  may  embrace  two 
or  more  of  the  control  accounts  carried  in  the  mine  office  ledger. 

Account  Classification 

The  account  classification  which  follows  shows  the  detail 
ledger  accounts  embraced  by  the  general  ledger  control  accounts, 
arranged  in  convenient  form  for  the  preparation  of  a  trial  bal- 
ance. The  consecutive  numbering  of  the  general  ledger  accounts, 
with  the  use  of  the  same  key  number  to  designate  the  subsidiary 
accounts  controlled  by  the  general  ledger  account,  is  of  great 
advantage  as  a  time-saver  and  as  a  means  of  insuring  the  correct 


208  ACCOUNTING— THEORY  AND  PRACTICE 

classification  of  expenditures.  The  study  of  the  following  pages 
will  show  that  similar  account  numbers  are  used  for  accounts 
common  to  both  the  general  office  and  mine  office  ledgers. 

Ledger  Accounts  for  the  General  Office 

Account 

Number  Account  Title 

1  Mining  Property 

2  Plant  and  Equipment 

3  Construction  in  Progress 

4  Materials  and  Supplies 

5  Mined  Ore  on  Hand 

6  Investment  Securities 

7  Bills  Receivable 

8  Accounts  Receivable 

9  Deferred  Charges 

10  Suspense 

11  Mine  Office 

12  Banks 

13  Cash 

14  Working  Capital  Liability 

15  Bonds  Payable 

16  Bills  Payable 

1 7  Accounts  Payable 

18  Dividends  Payable 

19  Pay  Checks 

20  Vouchers  Payable 

2 1  Unsubscribed  Capital  Stock,  par 

22  Capital  Stock,  par 

23  Treasury  Stock,  par 

24  Bonds  in  Treasury,  par 

25  Surplus  from  Donated  Stock 

26  Surplus  Earned 

27  Reserves 

27-1  Reserve  for  Depletion  of  Mine 

27-2  Reserve  for  Depreciation  of  Plant  and  Equipment 

28  Profit  and  Loss 

29  Operating  Expenses 

29-1  Mine  Development 
29-2  Ore- Breaking 


PRECIOUS  METAL  MINE  ACCOUNTING  209 

29-3  Transportation,  Mine  to  Railroad 

29-  4  Shipping  and  Selling 

29-5  Miscellaneous  Maintenance  and  Repairs 

29-  6  General  Mine  Overhead  Expenses 

29-7  Organization  Expenses 

29-  8  General  Office  Administrative  Salaries 

29-  9  General  Office  Clerical  Expenses 
29-10  General  Office  Supplies  and  Expenses 
29-1 1  General  Office  Stationery  and  Printing 
29-12  Employers'  Liability  Insurance  Premiums 
29-13  Fire  Insurance  Premiums 

29-14  Legal  Expenses 
29-15  Property  Taxes 
29-16  Income  Taxes 
29-17  Bad  Debts 
29-18  Interest  Allowed 
30  Income 

30-  I  Ore  Production,  gross 
30-  2  Rentals 

30-  3  Interest  Earned 

30-  4  Miscellaneous  Income 


Ledger  Accounts  for  the  Mine  Office 

Account 

Number  Account  Title 

2  Plant  and  Equipment 

2-1  Power  Plant 
2-2  Blacksmith  Shop 

3  Construction  in  Progress 

4  Materials  and  Supplies 

5  Mined  Ore  on  Hand 

7  Bills  Receivable 

8  Accounts  Receivable 

11  General  Office 

12  Banks 

13  Cash 

16      Bills  Payable 

19  Pay  Checks 

20  Vouchers  Payable 

VOL.  HI — 14 


2IO  ACCOUNTING— THEORY  AND  PRACTICE 

27  Reserves 

27-1  Reserve  for  Depletion  of  Mine 

27-2  Reserve  for  Depreciation  of  Plant  and  Equipment 

27-3  Reserve  for  Depreciation  of  Dwellings 

28  Profit  and  Loss 
29-1  Mine  Development 

29-1  (a)  Diamond  Drilling 

29-1  (b)  Drilling  and  Blasting 

29-1  (c)  Filling 

29-1  (d)  Timbering 

29-1  (e)  Mucking  and  Tramming 

29-1  (f)  Pipe  and  Track  Work 

29-1  (g)  Assaying 

29-1  (h)  Engineering  and  Surveying 

29-1  (i)  Blacksmithing 

29-1  (j)  Pumping 

29-1  (k)  Hoisting 

29-1  (1)  Power 

29-1  (m)  Depreciation  of  Plant  and  Equipment 
29-2  Ore-Breaking 

29-2  (a)  Drilling  and  Blasting 

29-2  (b)  Handling  in  Slopes 

29-2  (c)  Filling 

29-2  (d)  Timbering 

29-2  (e)  Mucking  and  Tramming 

29-2  (f)  Pipe  and  Track  Work 

29-2  (g)  Assaying 

29-2  (h)  Engineering  and  Surveying 

29-2  (i)  Blacksmithing 

29-2  (j)  Pumping 

29-2  (k)  Hoisting 

29-2  (1)  Power 

29-2  (m)  Depreciation  of  Plant  and  Equipment 
29-5  Miscellaneous,  Maintenance  and  Repairs 

29-5  (a)  Office  Building 

29-5  (b)  Miners'  Mess  House 

29-5  (c)  Miscellaneous  Buildings 

29-5  (d)  Roads  and  Trails 
29-6  General  Mine  Overhead  Expenses 

29-6  (a)  Salaries 

29-6  (b)  Clerical  Help 


PRECIOUS  METAL  MINE  ACCOUNTING  211 

29-6  (c)    Office  Expenses  and  Supplies 

29-6  (d)    Telegrams,  Postage  and  Telephone 

29-6  (e)    Extraordinary  Expenses 

29-6  (f)     Depreciation  of  Plant  and  Equipment 

29-6  (g)    Depletion  of  Mine 
29-x  Power  Plant  Operations  (clearing  account) 
29-x  Blacksmith  Shop  Operations  (clearing  account) 
29-x  Pumping  (clearing  account) 
29-x  Hoisting  (clearing  account) 

30  Income 

30-1  Ore  Production,  gross 
30-2  Rentals 
30-3  Interest  Earned 
30-4  Miscellaneous  Income 

31  Pay-Roll  (clearing  account) 

The  advantages  of  the  above  classification  are  apparent. 
By  the  operation  of  general  ledger  control  accounts,  all  details 
of  income  and  expense  are  carried  in  the  subsidiary  ledgers  and 
only  a  brief  examination  of  the  general  ledger  accounts  is 
necessary  to  show  at  the  end  of  the  month  how  income  compares 
with  expenses. 

Operation  of  Control  Accounts  in  General 

The  operation  of  the  foregoing  controlling  accounts  is  gov- 
erned by  well-known  accounting  principles,  the  detail  ledgers 
being  used  for  recording  the  daily  transactions  which  at  the  end 
of  the  month  are  posted  in  total  to  the  general  ledger  from  the 
subsidiary  books.  Further  analysis,  as  is  often  necessary  for 
special  purposes,  is  facilitated  by  the  use  of  the  space  provided 
in  the  detail  ledger  accounts  to  show  the  details  of  the  entry, 
voucher  number  (if  any) ,  and  brief  particulars. 

Some  Specific  Control  Accounts 

The  form  of  some  of  the  detail  accounts  and  their  relation  to 
the  controlling  accounts  need  brief  explanation. 

Construction  in  Progress  (3)  is  a  control  account  temporarily 
maintained  to  indicate  the  amount  of  any  unfinished  construe- 


212  ACCOUNTING— THEORY  AND  PRACTICE 

tion  in  progress.  As  soon  as  any  part  thereof  is  completed, 
a  journal  entry  is  made  transferring  the  item  to  Plant  and 
Equipment  or  other  suitable  asset  account. 

The  inventories  are  represented  by  the  three  control  accounts: 

■1  Plant  and  Equipment 

4  Materials  and  Supplies 

5  Mined  Ore  on  Hand 

So  far  as  possible,  the  inventory  items  should  be  listed  all  in 
one  day.  Notice  should  be  given  in  advance  and  due  prepara- 
tion made  so  that  this  can  be  done  with  the  least  possible  inter- 
ruption of  the  current  work.  The  ordinarily  recognized  princi- 
ples for  valuing  the  inventories  of  plant  and  equipment  and 
materials  and  supplies  govern  here  as  in  other  lines  of  business. 

Valuing  Ore  Mined 

Mined  Ore  on  Hand  should  be  estimated  carefully  as  to  ton- 
nage and  its  valuation  should  be  only  the  estimated  cost  per  ton 
to  mine  the  ore  and  deliver  it  to  the  place  where  stored.  To 
value  this  ore  at  its  assay  value  would  be  to  ignore  the  fact  that 
the  gross  value  of  all  the  ore  in  the  mine  has  been  taken  into 
consideration  in  the  original  capitalization  of  the  mine.  There- 
fore the  valuation  to  be  accurate  and  conservative  should  be 
restricted  to  the  amount  expended  as  stated  above. 

The  valuation  of  ore  in  transit,  however,  is  another  matter. 
Such  ore  presumably  has  been  sold  to  the  smelters,  which  will 
pay  for  the  gross  values  agreed  upon  less  freight  and  treatment 
charges.  Therefore  it  is  customary  to  value  ore  in  transit  as  an 
account  receivable  subject  to  later  adjustment  when  the  smelting 
and  other  charges  are  known. 

When  ore  is  shipped  to  the  smelter,  two  methods  of  handling 
the  transaction  are  used.  Under  the  one,  the  transaction  is  held 
on  memorandum  until  the  smelter  settlement  sheet  is  received 
on  the  basis  of  which  cash  (or  the  smelter)  is  charged  and  the 
proper  income  account.  Ore  Production  (or  Ore  Sales),  is  credited. 


PRECIOUS  METAL  MINE  ACCOUNTING  213 

Under  the  other  method,  when  the  ore  is  shipped  the  smelter  is 
charged  on  the  basis  of  the  company's  own  assay,  and  Suspense 
or  Ore  in  Transit  Suspense  is  credited,  these  being  somewhat  in 
the  nature  of  memorandum  accounts.  Upon  receipt  of  the 
settlement  sheet,  this  entry  is  reversed  and  the  entry  indicated 
under  the  first  method  is  made. 

It  should  be  noted  that  mining  companies  make  it  a  rule  to 
keep  some  mined  ore  stored  in  the  mine  stopes  either  as  a  reserve 
for  stabilizing  the  amount  of  ore  sold  or  for  the  purpose  of  holding 
it  for  a  higher  price  on  a  rising  market. 

Depletion  and  Depreciation 

A  mine  by  the  very  nature  of  its  operations  is  a  wasting  asset 
and  the  payment  of  returns  to  the  stockholders  necessarily  in- 
volves a  reduction  of  the  capital  assets.  The  investor  in  the 
stock  of  a  mining  company  knowingly  assumes  more  than  the 
ordinary  business  risks,  because  he  expects  larger  returns  if  the 
mine  produces  to  the  extent  of  expectations. 

Every  ton  of  ore  removed  from  a  mine  depletes  the  available 
supply  and  reduces  the  value  of  the  original  deposit.  In  recog- 
nition of  this  fact  a  well-managed  mining  company  includes  in 
its  operating  expenses  a  fixed  charge  per  ton  for  depletion,  the 
amount  being  estimated,  because  it  is  impossible  to  ascertain 
exactly  the  tonnage  of  ore  the  mine  will  produce.  This  charge 
constitutes  a  sinking  fund  provision  which  is  credited  to  Reserve 
for  Depletion  of  Mine.  Where  a  reserve  for  depletion  has  been 
established  and  the  funds  in  the  company  treasury  permit,  capital 
dividends  may  be  declared  on  the  basis  of  this  reserve,  in  addition 
to  the  dividends  based  on  the  profits  from  net  earnings  and  de- 
clared out  of  surplus.  However,  this  segregation  of  dividends  as 
between  a  return  of  capital  and  a  distribution  of  profits  is  not 
always  attempted. 

It  is  claimed  by  some  that  it  is  impracticable  for  mining  com- 
panies to  establish  this  depletion  charge  because  during  the  early 
stages  of  the  development  of  the  mine  the  stock  may  be  worth 


214  ACCOUNTING— THEORY  AND  PRACTICE 

intrinsically  but  a  small  fraction  of  its  par  value,  and  that  like- 
wise, when  the  payment  of  large  dividends  is  assured,  the  same 
stock  may  be  worth  far  more  than  its  par  value.  In  this  con- 
nection, the  relation  of  the  depletion  charge  to  the  value  of  the 
stock  is  not  important  because  the  company,  as  such,  can  only 
deal  with  the  redemption  of  its  capital  based  upon  the  par  value 
of  the  stock. 

The  depreciation  of  plant  and  equipment  is  for  the  most  part 
more  rapid  in  mining  than  in  other  industries.  Machine  drills, 
for  instance,  sustain  a  high  amount  of  depreciation,  and  also  the 
sundry  small  tools,  ore  cars,  and  buckets.  Different  rates  of 
depreciation  will  usually  apply  to  underground  and  surface 
equipment.  The  possibility  of  the  complete  depletion  or  aban- 
donment of  the  mine  before  the  expiration  of  the  ordinary  life 
of  plant  and  equipment  should  be  considered  in  connection  with 
depreciation  rates.  In  order  to  equalize  per  ton  costs,  deprecia- 
tion is  sometimes  figured  on  a  tonnage  output  basis,  care  being 
exercised  to  see  that  at  the  end  of  the  year  sufficient  depreciation 
has  been  written  off  as  estimated  on  the  basis  of  the  expected  life 
of  the  equipment.  To  distribute  properly  the  estimated  annual 
depreciation  as  part  of  the  operating  expenses,  the  inventory  of 
plant  and  equipment  should  be  made  up  in  groups  and  classified 
lists  in  such  form  as  to  make  possible  the  preparation  of  tables  of 
depreciation  at  approved  rates.  The  total  of  the  annual  amount 
should  be  divided  by  12  to  find  the  amount  per  month  to  be 
included  in  operating  expenses. 

Classification  of  Expenditures 

The  following  suggestions  are  given  for  the  proper  distribution 
of  expenditures  for  labor  and  materials  and  supplies: 

Account 

Number  Title 

2C)-i  Mine  Development 

To  consist  of  labor,  explosives,  candles  or  oils  or  other 
lights,  rails,  drill  steel,  tools,  picks,  timbers,  or  other  ma- 


PRECIOUS  METAL  MINE  ACCOUNTING  215 

terials  used  in  drifting,  sinking,  or  driving  for  development 
purposes;  to  include  proper  apportionment  of  power,  hauling 
out  or  in  or  hoisting  of  waste  for  development  purposes. 
29-2  Ore-Breaking 

To  include  labor,  explosives,  candles,  oils  or  other 
lights,  tools,  rails,  drills,  picks,  or  other  materials  or  imple- 
ments used  directly  in  breaking  ore  or  stoping  it  ready  for 
shipment  or  storage;  to  include  proper  apportionment  of 
power,  hauling  of  ore,  or  hoisting  same, 
29-3  Transportation,  Mine  to  Railroad 

To  include  all  expenses  for  labor  or  supplies  incidental 
to  removing  the  ore  from  the  mine  entrance  to  the  railroad 
point  for  shipment  and  to  cover  wagon  haulage,  if  any,  or 
aerial  tramway  conveyance. 
29-4  Shipping  and  Selling 

To   include  railroad   freight  on  ores,   any  switching 
charges  in  connection  therewith,  shipment  assays,  umpiring, 
and  shippers'  agent  fees. 
29-5  Miscellaneous  Maintenance  and  Repairs 

To  include  the  expense  of  maintenance  and  upkeep  of 
roads  and  trails,  and  general  surface  improvements. 
29-6  General  Mine  Overhead  Expenses 

To  include  superintendent's  salary,   clerical  help  in 
mine  office,  office  expenses,  etc. 
29-x  Clearing  Accounts 

These  include  Power  Plant  Operations,  Blacksmith 
Shop  Operations,  Pumping,  and  Hoisting,  which  are  pro- 
rated over  the  other  departments  of  work  in  proportions 
equitably  estimated.  The  number  of  these  clearing  ac- 
counts depends  upon  the  detail  in  which  expenditures  are 
classified  and  the  extent  of  the  company's  operations. 

Deferred  Charges — Mine  Development 

In  addition  to  the  usual  deferred  charges  of  unexpired  insur- 
ance premiums  paid  in  advance,  rentals  in  advance,  etc.,  the 


2l6  ACCOUNTING— THEORY  AND  PRACTICE 

amortized  portion  of  which  is  charged  to  operations  monthly, 
an  important  item  usually  handled  as  a  deferred  charge  in  mine 
accounting  is  that  of  mine  development.  Such  development  rep- 
resents temporarily  unproductive  work,  usually  of  an  exploratory 
nature,  in  which  almost  every  ore  mining  company  is  necessarily 
engaged,  whether  upon  a  production  basis  or  not.  The  sinking 
of  a  new  shaft  or  the  driving  of  a  tunnel  in  quest  of  ore  may  be 
considered  as  a  development  for  future  productive  operations 
just  as  much  as  the  purchase  of  plant  and  equipment.  Ade- 
quate provision  must,  of  course,  be  made  for  gradually  writing 
off  these  expenditures  which  should  be  amortized  before  the  mine 
has  been  completely  worked  out.  Mine  Development  account 
should  never  be  used  as  a  ''  dump  "  for  the  purpose  of  making  the 
operating  expenses  appear  lower  than  they  are  and  thus  inflating 
the  assets  of  the  company,  and,  certainly,  stock  commissions  and 
similar  items  should  never  be  buried  here.  In  the  event  that  a 
distinct  development  work  happens  to  produce  ore  which  is 
taken  out  and  shipped,  the  value  of  the  ore  is  not  credited  to  Ore 
Production  but  to  Mine  Development. 

Clearing  Accounts 

Certain  general  mine  expenses  are  treated  as  indirect  charges, 
i.e.,  common  toalldepartmentsof  operation.   Included  in  these  are: 

1.  Hoisting  expense,  where  both  ore  and  waste  in  a  shaft 

are  being  constantly  raised  to  the  surface. 

2.  Pumping  expense,  where  water  is  encountered  in  the  mine 

and  has  to  be  removed  to  permit  operations  to  continue, 
whether  for  mine  development  or  ore-breaking. 

3.  Power  plant  operations,  for  supplying  compressed  air 

to  the  machine  drills  used  on  ore  extraction  or  mine 
development,  or  for  other  purposes,  such  as  blowing 
out  powder  smoke,  etc. 

4.  Material  department  expense,  including  the  wages  of  the 

stores  and  timekeepers,  whose  time  is  at  the  disposal  of 
all  classes  of  work. 


PRECIOUS  METAL  MINE  ACCOUNTING  217 

These  indirect  charges  are  carried  in  clearing  accounts  from 
which  they  are  prorated  over  the  main  operating  accounts  on  an 
equitable  basis.  To  dispose  of  the  clearing  accounts  it  is  often 
necessary  to  make  arbitrary  apportionments  over  the  kinds  cf 
work  considered  to  have  been  benefited. 

Distribution  Sheets  for  Labor,  Materials  and  Supplies 

It  is  not  desirable  to  fill  the  books  of  account  with  miscella- 
neous details  which,  if  neatly  tabulated  in  the  original  record,  can 
be  used  as  the  original  entry  and  filed  conveniently  for  reference. 
Two  current  monthly  work  sheets,  of  a  similar  type,  record  the 
daily  distribution  of  the  labor  expended  and  suppUes  used.  The 
labor  distribution  sheet  is  illustrated  in  Form  i.  The  basis  for 
the  distribution  is  the  foreman's  report  through  the  timekeeper 
as  to  how  each  man's  time  has  been  employed.  Each  day's 
labor  distribution,  if  correctly  made,  will  agree  in  total  with  the 
pay-roll  entries  for  the  same  period.  At  the  end  of  the  month 
the  footings  of  the  sheet  should  be  totaled  and  a  journal  entry 
prepared  therefrom  to  charge  the  various  accounts  shown  in  the 
headings  and  to  credit  the  total  to  Pay-Roll  account,  as  follows: 

Mine  Development $7,200.00 

Ore-Breaking 8,900.00 

Miscellaneous  Maintenance  and  Repairs 750.00 

Pay-Roll $16,850.00 

The  distribution  of  the  materials  and  supplies  used  should 
include  not  only  the  invoice  cost  of  the  goods  but  also  supple- 
mental charges  for  railroad  freight  and  hauling  to  the  warehouse. 
The  proportion  of  the  railroad  freight  chargeable  to  each  item  can 
be  ascertained  from  the  freight  bills.  To  apportion  the  heavy 
hauling  charges  fairly  is  less  simple  because  the  hauling  is  paid  for 
by  weight  irrespective  of  the  railroad  classification,  each  load 
usually  being  a  mixture  of  supplies  of  varying  values.  The  best 
way  to  solve  the  difficulty  is  for  the  mine  office  to  carry  the  freight 
and  delivery  charges  in  a  Mine  Supplies  account,  and  to  work  out 
from  experience,  subject  to  correction,  an  estimated  delivered 


2l8 


ACCOUNTING— THEORY  AND  PRACTFCE 


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PRECIOUS  METAL  MINE  ACCOUNTING 


219 


cost  price  list  under  various  classifications,  this  to  be  used  in 
pricing  the  supplies  issued.  The  operation  of  this  account  will 
bring  about  at  the  end  of  the  year  some  difference  between  the 
aggregate  of  the  physical  inventory  and  the  balance  standing  to 
the  debit  of  Materials  and  Supplies  in  the  general  ledger.  This 
difference  can  be  adjusted  by  an  adjusting  journal  entry  between 
the  Materials  and  Supplies  account  and  the  various  operating 
accounts.  It  should  be  the  aim  of  the  mine  office  so  to  price  the 
materials  and  supplies  used  as  to  make  this  periodic  adjustment 
as  small  as  possible,  and  to  that  end  the  cost  price  Hst  should  be 
subjected  to  constant  revision. 

The  storekeeper,  operating  a  complete  stores  system,  should 
maintain  a  perpetual  inventory  in  the  form  of  a  suitable  card 
index  classified  into  appropriate  groups  for  ready  reference,  as 
shown  in  Form  2.     From  the  work  sheet,  similar  to  Form  i,  upon 


PERPETUAL  INVENTORY  OF  MATERIALS  AND  SUPPLIES 

N 

0. 

Classifica*'""                                                                 Artirle 

Unit 

Maximum  to  be  on  Hand 

Minimum  to  be  on  Hand 

From 

Invoice 
Date 

Quantity 

Invoice 
Cost 

Freight 

Hauling 

Total 

Issued 
Date 

Quantity 

@ 

Amount 

Balance      j 

Ouantily 

Amaunl[ 

1 1 

' J 

u 

'— 1 

1 Li 

1 1-J 

- 

— 



- 

Form  2.     Perpetual  Inventory  j  or  Materials  and  Supplies 

which  the  daily  issues  of  materials  and  supplies  are  distributed,  a 
recapitulation  is  prepared  from  which  a  journal  entry  is  made  to 
debit  the  various  accounts  kept  with  the  kind  of  work  done  and 
credit  Materials  and  Supphes. 

After  the  journal  entries  have  been  made  from  the  two  current 
distribution  work  sheets,  the  latter  are  filed  in  an  envelope  to- 
gether with  the  signed  requisitions,  etc.,  relating  thereto.  The 
record  of  the  detail  figures  is  thereby  confined  to  their  original 
entry. 


220  ACCOUNTING— THEORY  AND  PRACTICE 

Statistical  Records 

Statistical  records  of  various  kinds  should  be  kept  at  the 
mine  office  to  facilitate  the  work  of  preparing  reports  for  the  com- 
pany's use  and  for  state  and  federal  reports.  These  shouJd 
include : 

1.  Property  list 

2.  Equipment  list 

3.  Insurance  poHcy  data 

4.  Current  assays 

5.  Ore  shipments 

1.  The  property  list  should  be  tabulated  in  groups,  showing 
names  of  claims,  when  and  how  acquired,  and  general  remarks. 
Each  building  should  be  numbered  and  listed  as  to  its  locationi 
purpose,  brief  description,  cost,  additions,  etc. 

2.  Equipment  should  be  listed  under  convenient  heads, 
showing  date  acquired,  location,  cost,  etc.  These  headings 
should  be  selected  with  a  view  to  convenience  of  reference,  as 
this  list  will  be  used  when  preparing  tables  of  depreciation  and 
placing  fire  insurance. 

3 .  Insurance  policies  should  be  listed  in  order  of  dates,  show- 
ing the  names  of  the  companies,  policy  numbers,  amount,  annual 
premiums,  names  and  addresses  of  agents,  and  properties  insured. 
Expirations  should  be  noted  in  advance  on  the  daily  tickler. 

4.  The  result  of  every  assay  made  to  test  the  ore  contents 
in  the  mines  should  be  recorded  as  to  date,  number,  from  where 
sample  was  taken,  analysis,  by  whom  made,  etc.  The  original 
assay  sheets  should  be  filed  in  numerical  order.  Some  companies 
have  sufficient  assay  work  to  justify  the  employment  of  their 
own  assayer  in  charge  of  a  laboratory.  In  such  cases  the  assay 
office  becomes  a  department  of  work.  Where  no  such  laboratory 
is  maintained,  the  work  is  done  by  outside  assayers. 

5.  Ore  shipments  to  the  smelters  should  be  numbered  and 
recorded  in  permanent  form  to  show  date,  to  whom  shipped,  the 
smelter  number,  car  number,  assay  values,  prices  used  in  settle- 


PRECIOUS  METAL  MINE  ACCOUNTING  221 

ment,  and  other  important  facts.  In  some  cases,  the  information 
includes  the  different  metal  contents  in  ounces  or  pounds  of  each 
ore  shipment. 

Other  Books  of  Account 

The  voucher  register  contains  all  entries  for  accounts  payable 
and  shows  the  distribution  thereof.  The  total  of  the  credits  to 
Vouchers  Payable  should  be  posted  from  the  summary  for  the 
month  to  the  control  account  in  the  general  ledger.  An  alpha- 
betical card  index  is  maintained  whereby  the  different  voucher 
numbers  assigned  to  each  concern  may  be  found. 

Purchases  should  be  handled  and  regulated  as  in  any  well 
organized  business.  All  materials  and  supplies  purchased, 
including  equipment,  should  be  considered  as  passed  over  to  the 
care  of  the  storekeeper,  who  is  to  be  held  responsible  for  same  and 
made  to  report  where  and  for  what  purpose  he  has  allowed  same 
to  leave  his  possession.  It  is  important  that  the  storekeeper  be 
instructed  as  to  the  difference  between  capital  and  revenue  ex- 
penditures in  order  that  he  may  check  the  distributions  reported 
to  him  for  supplies  issued.  Requisitions  should  be  required  in 
advance  for  all  merchandise  needed  and  the  authorized  purchase 
order  forms  used  with  standard  follow-up  methods.  A  descrip- 
tion of  this  procedure  is  unnecessary. 

The  journal  is  employed  for  cross-entries  and  for  its  usual 
purposes,  including  adjusting  and  closing  entries  at  the  end  of 
the  fiscal  period. 

Miscellaneous  Operations 

Most  mining  companies  have  to  provide  accommodations  for 
their  employees,  such  as  a  mess  house,  bunk  house,  or  clubroom. 
The  last  named  is  usually  maintained  entirely  at  the  expense  of 
the  company,  but  the  board  and  room  accommodations  are 
charged  to  the  men  at  a  fixed  rate  per  day,  which  is  deducted  from 
their  pay.  Sometimes,  the  company  rents  buildings  for  these 
purposes  to  someone  else  to  operate  independently,  collecting  the 


222  ACCOUNTING— THEORY  AND  PRACTICE 

charges  from  pay-roll  settlements  and  turning  the  total  over  to 
the  operator  at  regular  periods.  The  method  of  accounting  for 
such  operations  calls  for  no  comment. 

It  is  not  an  uncommon  thing  for  a  mining  company  to  lease 
out  part  of  its  property  on  a  royalty  basis.  Such  leases  are 
often  taken  by  local  miners  who  believe  they  know  where  fresh 
ore  is  to  be  found.  If  successful  in  their  search,  they  are  amply 
rewarded  for  their  efforts  while  the  mining  concern  also  benefits 
by  their  discovery.  Any  royalties  so  received  are  considered 
as  miscellaneous  earnings  and  not  as  ore  production. 

Cash  Receipts  and  Disbursements 

The  smelter  settlement  checks  are  sent  direct  to  the  general 
office  with  the  original  settlement  sheet.  A  duplicate  statement  is 
often  forwarded  to  the  mine  office  to  enable  it  to  prepare  its  oper- 
ating cost  and  revenue  statements.  Upon  receipt  of  these  settle- 
ment checks  the  general  office  debits  Cash  and  credits  Mine 
Office  for  the  amount,  while  the  mine  office  debits  General  Office 
and  credits  Ore  Production  with  the  same  figure. 

As  a  general  and  desirable  rule  the  cash  receipts  of  the  mine 
office  are  limited  so  far  as  possible  to  a  monthly  appropriation 
from  the  general  office  for  operating  expenses  in  accordance  with 
a  budget  submitted  in  advance  by  the  mine  office.  Sundry  sales 
of  materials  and  supplies  may  take  place,  but  these  are  usually 
not  extensive  enough- to  call  for  any  special  accounting.  Amounts 
due  from  employees  for  rentals,  etc.,  are  deducted  upon  the  pay- 
roll and  do  not  represent  funds  paid  into  the  mine  office.  At 
the  end  of  the  month  the  mine  office  should  prepare  a  report  of 
cash  receipts  and  disbursements  which  it  sends  to  the  general 
office  together  with  a  copy  of  the  mine  general  ledger  trial  balance 
listing  the  total  debits  and  credits  of  each  account,  not  the  net 
balances.  This  is  necessary  in  order  that  the  general  office  may 
prepare  an  abstract  of  the  month's  transactions  at  the  mine  office 
for  record  in  the  general  office  books.  All  control  accounts, 
of  course,  should  be  reconciled  with  the  detail  ledgers. 


PRECIOUS  METAL  MINE  ACCOUNTING  223 

Treatment  of  Special  Items 

Surplus  from  Donated  Stock,  not  being  an  earned  surplus, 
should  be  maintained  as  a  separate  account.  The  ordinary 
surplus  account  is  intended  to  reflect  the  net  earnings  from  min- 
ing operations.  By  making  this  distinction,  the  balance  sheet 
shows  the  actual  facts.  Surplus  from  Donated  Stock  represents 
a  book  value  only  and  is  subject  to  reduction  when  any  treasury 
stock  is  sold  at  less  than  its  par  value. 

Any  mining  royalties  paid  by  the  mining  company  are  a 
capital  expenditure  when  applied  to  the  purchase  price  of  the 
mine,  otherwise  they  should  be  included  in  operating  expenses. 

Interest  on  funds  borrowed  for  construction  purpose  is  a  proper 
charge  to  construction  in  progress  only  during  the  period  thereof. 

When  there  is  a  sufficient  credit  to  Reserve  for  Depletion  of 
Mine,  a  capital  dividend  may  be  declared  therefrom,  provided, 
of  course,  there  are  funds  in  the  treasury  to  permit  this  with- 
drawal. As  such  dividends  represent  the  liquidation  of  capital 
they  may  be  charged  to  the  Capital  Stock,  par  account,  or  carried 
in  a  suitable  capital  stock  valuation  account. 

Closing  the  Books 

At  the  end  of  the  fiscal  year  the  books  are  closed  in  the  usual 
manner  after  the  inventories  have  been  taken  and  the  necessary 
adjustments  have  been  made.  Due  provision  should  be  made 
for  bad  debts,  if  any  seem  probable,  and  for  federal  income  and 
excess  profits  taxes  due  on  the  year's  earnings  by  charging  Taxes 
and  crediting  Reserve  for  Federal  Taxes.  When  the  taxes  are 
paid  in  the  ensuing  year,  they  are  charged  to  this  reserve  account. 
After  the  accounts  have  been  closed  and  ruled  off,  the  balance 
standing  in  the  Profit  and  Loss  account  should  be  closed  by 
journal  entry  into  Surplus  account. 

Annual  Reports 

The  annual  reports  should  include  the  balance  sheet,  profit 
and  loss  statement,  production  report,  mine  footage  report,  to- 


224  ACCOUNTING— THEORY  AND  PRACTICE 

gether  with  a  report  of  some  kind  from  the  board  of  directors. 
Two  of  these  forms  are  given  in  outline  below: 

The  ABC  Mining  Company 

Balance  Sheet 

As  at  December  31,  19 — 

Assets 
Fixed : 

Mining  Property $ 

Less — Reserve  for  Depletion $ 

Plant  and  Equipment $ 

Less — Reserve  for  Depreciation 

Construction  in  Progress $ 

Current: 

Materials  and  Supplies 

Mined  Ore  on  Hand 

Investment  Securities 

Bills  Receivable 

Accounts  Receivable 

Cash  on  Hand  and  in  Banks 


Deferred: 
Deferred  Charges  to  Operations . 

Suspense    

Mine  Development 

Total  Assets 


Liabilities 


Fixed: 

Bonds  Payable 

Working  Capital  Liability. 

Current. 

Bills  Payable 

Accounts  Payable 

Dividends  Payable 

Pay  Checks 

Vouchers  Payable 

Total  Liabilities.  . . 


PRECIOUS  METAL  MINE  ACCOUNTING 

Excess  of  Assets  over  Liabilities 

Represented  by: 

Capital  Stock,  par,  authorized $ 

Less — Treasury  Stock,  par $ . 

Surplus  from  Donated  Stock $ 

Surplus,  earned  i/i/ — 

Add — 19 —  earnings 

Reserves 

Total  Capital $ . 


225 


The  ABC  Mining  Company 
Profit  and  Loss  Statement 
For  the  Year  Ended  December  31,  19- 


Production: 

Tons  Ore  Production,  gross $ 

Less — Smelter  Charges  Deducted 

Net  Smelter  Returns $ . 

Expenses: 

Labor  and  Supplies  for: 

Mine  Development $ 

Ore  Breaking 

Transportation,  Mine  to  Railroad. . ...     $ 

Shipping  and  Selling 

Miscellaneous    Maintenance   and    Re- 
pairs   

General  Mine  Overhead  Expense 

Other    Administrative     and     General 

Expenses 

Net  Operating  Profit $ . 

Add — Miscellaneous  Income 

Reserved  for  Federal  Taxes $ . 

Net  Profits  to  Balance  Sheet $ . 

VOL.  Ill — IS 


Average 
Per  Ton 


CHAPTER  VII 

RANCH  COST  ACCOUNTING 

By  Clem  W.  Collins 

I.  Accounting  Organization  and  Records 

Treatment  from  Accountant's  Viewpoint 

It  has  been  the  writer's  observation  that  most  of  the  articles 
and  books  on  the  subject  of  farm  accounting  are  written  in  a  more 
or  less  elementary  manner,  being  intended  primarily  for  the  use 
of  the  farmer.  Such  treatment  of  the  subject  fills  a  real  need,  for 
accounting  in  connection  with  farming  is  greatly  neglected  and 
treatises  written  with  a  view  to  interesting  the  farmer  and  aiding 
him  in  starting  and  keeping  even  the  elements  of  an  accounting 
system  are  highly  laudable. 

There  seems  to  be  a  real  need,  also,  for  such  treatment  of  the 
subject  as  will  aid  those  whose  duty  it  is  to  design  and  supervise 
systems  for  agricultural  enterprises.  Only  a  complete  analysis 
of  the  operations  of  the  business  from  the  viewpoint  of  the 
accountant  will  make  clear  the  principles  involved  and  enable  the 
student  to  devise  the  necessary  system  for  bringing  out  the  most 
important  facts.  For  this  reason  the  subject  is  here  treated  from 
the  viewpoint  of  the  accountant. 

Farming — A  Manufacturing  Process 

Farming  is  essentially  a  manufacturing  process  and  the  finished 
product  is  whatever  the  farmer  finally  markets,  such  as  grain, 
hay,  beef,  pork,  mutton,  vegetables,  etc.  The  process  is  com- 
plicated by  the  fact  that  it  is  necessary  to  manufacture  numerous 
products  each  of  which  in  turn  becomes  a  component  part  of 
another  product.     Grain  is  raised  which  is  itself  a  finished  prod- 

226 


RANCH  COST  ACCOUNTING  227 

uct;  it  is  fed  to  horses  creating  there  another  finished  product; 
the  horses  provide  the  power  with  which  to  raise  hay,  another 
finished  product;  the  hay  in  turn  is  fed  to  cattle,  producing  a 
final  finished  product  of  beef.  Each  process  has  certain  by-prod- 
ucts each  of  which  is  or  should  be  utilized. 

As  intimated,  farming  usually  embraces  at  least  two  classes 
of  operations,  namely,  agriculture  and  live  stock  raising.  In 
addition  improvement  and  development  are  carried  on  simul- 
taneously with  these  activities  and  often  continuously.  Each 
of  these  operations  may  be  divided  and  subdivided  ad  libitum;  for 
example,  agriculture  may  embrace  the  raising  of  several  crops, 
such  as  grain,  hay,  vegetables,  fruits,  etc.,  each  of  which  may 
include  various  kinds ;  and  live  stock  may  include  horses,  cattle, 
sheep,  hogs,  etc.,  each  of  which  constitutes  a  separate  line  of 
production  and  requires  separate  accounting;  while  improve- 
ments and  development  may  include  the  construction  of  houses, 
fences,  irrigation  canals,  or  clearing  ground,  breaking  ground, 
seeding  land,  etc. 

Problems  in  the  Determination  of  Farm  Costs 

The  valuation  or  appraisal  of  the  "goods  in  process"  is  one 
of  the  principal  problems  in  farm  accounting.  The  cost  of  the 
"raw  material"  consumed  up  to  a  given  point  in  the  process  of 
production  is  difficult  to  determine,  since  for  instance  the  value  of 
the  grass  consumed  by  a  cow  or  calf  cannot  be  accurately  esti- 
mated; and  even  if  this  were  possible  the  cost  of  the  grass  would 
not  measure  the  increase  in  value,  for  the  cow  would  consume 
more  than  the  calf  yet  she  would  not  increase  in  value;  while 
the  growth  of  the  calf  would  represent  a  value  far  greater  than  the 
feed  consumed.  So  it  is  plain  that  the  problem  of  inventorying 
requires  a  method  other  than  that  of  adding  material  and  labor 
consumed  and  overhead  expenses. 

Other  problems  confronting  the  accountant  are  the  equitable 
distribution  of  the  cost  of  boarding  men,  the  expense  of  keeping 
horses,  and  the  distribution  of  the  time  of  each.    The  problems 


228  ACCOUNTING— THEORY  AND  PRACTICE 

here  are  due  partly  to  the  fact  that  a  part  of  these  expenses  is 
incurred  in  maintenance;  that  is,  the  horses  are  used  and  fed  while 
doing  work  necessary  to  care  for  them,  and  the  men  are  paid  and 
boarded  while  doing  work  necessary  to  provide  food  and  shelter 
for  themselves. 

Departmental  Organization 

The  majority  of  farms  are  too  small  for  departmentizing  and 
even  where  they  are  large  enough  the  operations  are  often  so 
mutually  dependent  and  interrelated  that  departmentization  is 
impracticable,  if  not  impossible;  but  there  are  many  farms  that 
are  capable  of  departmental  organization;  therefore  the  ideal 
condition  will  be  used  as  an  example  and  the  principles  laid  down 
may  be  applied  to  individual  cases  so  far  as  practicable. 

On  almost  any  farm  at  least  one  division  of  operations  may 
be  made — the  division  of  agriculture  from  stock  raising.  The 
careful  segregation  of  these  two  operations  for  the  purpose  of 
accounting  control  may  furnish  information  of  the  utmost  impor- 
tance. It  is  the  familiar  case  of  two  classes  of  articles  being 
manufactured ;  if  the  costs  are  not  correctly  divided  between  the 
two,  one  class  may  be  produced  at  a  profit  while  the  other  may  be 
produced  at  a  loss.  So  long  as  the  profits  from  the  former  exceed 
the  loss  from  the  latter,  this  condition  of  affairs  may  go  on 
undetected. 

What  is  true  of  agriculture  and  stock  raising  is  equally  true  of 
their  subdivisions.  For  the  purpose  of  accounting  control  a 
department  should  be  established  for  each  kind  of  live  stock  pro- 
duced and  so  far  as  practicable  for  each  kind  of  agricultural 
product. 

The  Records — General  Books 

rhe  general  books  do  not  dififer  from  those  of  other  business 
concerns.  It  will  usually  be  found  that  a  ledger,  general  journal, 
cash  receipts  record,  check  record,  and  sales  journal  should  be 
used;  the  particular  kind  of  book  to  be  used  for  each  is  a  matter 


RANCH  COST  ACCOUNTING  229 

of  individual  preference  but  it  should  be  pointed  out  that  the 
cash  books  and  sales  journal  should  be  so  arranged  that  the 
entries  in  them  will  be  classified  in  accordance  with  the  scheme 
of  departmentization  adopted. 

Let  us  assume  that  the  operations  of  a  ranch  include  the 
following: 

1 .  Live  stock 

(a)  Cattle 

(b)  Horses 

(c)  Sheep 

(d)  Hogs 

2.  Produce 

(a)  Wheat 

(b)  Oats 

(c)  Barley 

(d)  Alfalfa 

(e)  Timothy 

(f)  Wild  Hay 

(g)  Potatoes 
(h)  Garden 

In  the  cash  receipts  record  there  should  be  money  columns 
headed  as  follows:  Total,  General  Ledger,  Charge  Accounts,  and 
Cash  Sales.  In  the  check  register  the  first  money  column  should 
be  headed  Total  and  following  that  should  be  columns  headed  to 
correspond  with  each  of  the  operations  enumerated  above  under 
the  headings  Live  Stock  and  Produce;  also  columns  headed  for 
other  accounts  that  are  active  enough  to  justify  columns  being 
set  aside;  the  last  columns  should  be  headed  as  follows: 

Miscellaneous  Accounts   ' 

1.  Name  of  Account 

2.  Amount 

Disbursements  affecting  accounts  for  which  no  columns  have 
been  set  aside  should  be  entered  here. 


230  ACCOUNTING— THEORY  AND  PRACTICE 

The  columns  in  the  sales  journal  should  correspond  with  the 
accounts  listed  above  under  the  headings,  Live  Stock  and  Prod- 
uce, and  in  addition  a  column  for  miscellaneous  sales.  Double 
columns  should  be  carried  for  each  of  these  headings,  one  for 
quantities  and  the  other  for  values.  The  purpose  of  carrying 
these  columns  for  quantities  is  to  provide  a  check  on  the  quanti- 
ties to  be  accoimted  for. 

Subsidiary  Records 

Where  an  extensive  analysis  of  expenses  is  desired,  subsidiary 
expense  records  may  be  used  to  advantage.  For  instance,  a 
controlling  account  maybe  established  for  house  expenses ;  in  a 
subsidiary  columnar  record  an  analysis  of  this  account  should  be 
made  to  show  groceries,  fuel,  meat  purchased,  meat  butchered, 
repairs  and  replacement  of  house  equipment,  cook,  etc. 

Similarly  a  controlling  account  for  repairs  of  equipment  may 
be  divided  in  a  subsidiary  record  to  show  separately  the  repairs  to 
grain  equipment,  hay  equipment,  horses  equipment,  irrigation 
equipment,  house  equipment,  etc. 

Other  similar  analyses  may  be  made,  the  extent  to  which  they 
should  be  carried  being  governed  by  the  degree  to  which  it  is 
desired  to  divide  the  operating  expenses. 

Statistical  Records — Acreage 

A  record  should  be  kept  of  the  acres  devoted  to  each  crop. 

This  information  is  used  in  several  ways,  including  the  following: 
If  the  plowing,  harrowing,  etc.,  done  to  put  the  groimd  in  proper 
condition  for  seeding,  is  finished  before  the  fields  are  plotted  for 
the  different  crops,  an  account  must  be  opened  for  plowing, 
another  for  harrowing,  etc.,  to  which  all  costs  of  these  operations 
arc  charged.  When  the  acreage  is  determined  those  accounts  are 
distributed  to  the  various  crops  on  the  basis  of  the  figures  shown 
in  the  acreage  record. 

Similarly  repairs  to  the  main  irrigation  system  may  usually 
be  equitably  distributed  over  crops  on  the  acreage  basis. 


RANCH  COST  ACCOUNTING  23 1 

Another  instance  is  that  of  repairs  and  depreciation  of  equip- 
ment used  in  harvesting  grain,  hay,  etc.  This  may  be  distributed 
to  the  crops  on  either  of  two  bases,  acreage  or  production.  The 
production  in  bushels  of  grain  or  tons  of  hay  may  be  quite  differ- 
ent in  the  case  of  two  crops  occupying  the  same  acreage,  due  to 
the  nature  of  the  crops,  weather  conditions  or  other  factors.  The 
labor  and  equipment  used  in  harvesting  two  crops  of  equal  acre- 
age would  be  approximately  the  same,  regardless  of  the  yield ;  the 
same  acres  must  be  gone  over  with  the  mower  or  binder  and  about 
the  same  volimie  of  straw  must  be  put  through  the  threshing 
machine  whether  the  yield  in  grain  is  heavy  or  light.  There  may 
be  some  variation,  as  a  light  grain  yield  may  be  accompanied  by  a 
light  straw  yield  but  this  is  not  always  the  case  and  in  any  event 
«^he  two  cannot  be  said  to  be  proportionate.  In  view  of  these 
facts,  acreage  seems  to  be  the  best  basis  for  distribution  of  these 
expenses.  The  information  furnished  by  the  acreage  record  is 
also  used  in  the  crop  record  described  below. 

The  acreage  record  should  be  made  continuous  from  year  to 
year  by  providing  a  column  for  each  year.  Down  the  side  of  the 
page  should  be  written  the  names  of  the  different  crops,  and  the 
acreage  each  year  extended  into  the  proper  column. 

Crop  Record 

A  crop  record  in  which  statistics  are  entered  each  year  will  be 
found  to  be  a  valuable  aid  to  the  farm  operator.  This  record 
should  be  a  columnar  book,  with  a  page  for  each  crop  and  a 
column  for  each  year's  statistics.  Down  the  left  side  of  the 
page  titles  should  be  written  indicating  the  nature  of  the  infor- 
mation to  be  recorded.  The  following  is  suggestive,  but  may  be 
varied  to  meet  individual  needs : 

•  1922    1921    1920    1919 

1.  Acres 

2.  Yield  (total) 

3.  Yield  per  acre • 


232  ACCOUNTING— THEORY  AND  PRACTICE 

1922  1921  1920  191^ 

4.  Average  yield  in  the  state  per  government 

statistics 

5.  Cost  of  production 

6.  Cost  of  production  per  unit 

7.  Average  market  value  per  unit 

8.  Average  market  value  of  yield  of  one  acre        

9.  Cost  of  yield  of  one  acre 

10.  Gross  profit  on  one  acre , 

11.  Date  commenced  seeding 

12.  Date  finished  seeding 

13.  Date  commenced  harvesting 

14.  Date  finished  harvesting 

The  information  will  be  different  in  the  case  of  such  products 
as  milk,  butter,  cream,  fruit,  etc.,  but  the  above  schedule  is 
indicative  of  the  kind  of  information  that  should  be  kept.  The 
idea  should  always  be  to  show  the  number  of  units  into  which  the 
source  is  divided,  e.g.,  number  of  acres  in  the  case  of  hay,  grain, 
or  roots  (crops  growing  under  ground,  as  potatoes) ;  the  number 
of  cows  in  the  case  of  milk,  butter,  and  cream;  the  number  of 
trees  in  the  case  of  fruit,  etc.  The  total  yield  should  also  be 
shown  and  the  yield  per  unit  of  source,  as  well  as  other  informa- 
tion suggested  in  the  schedule  above. 

Live  Stock  Records 

Records  similar  to  those  for  crops  described  above  should  be 
kept  for  live  stock.  A  page  will  be  used  for  each  kind  of  live 
stock  and  the  following  information  may  be  shown : 

Number  of  Head 
1922    1921     1920    1919    1918 

1.  Inventory  beginning  of  year 

2.  Purchases 

3.  Born 

4.  Total 


RANCH  COST  ACCOUNTING  233 

1922     1921     1920     1919    1918 


5.  Inventory  end  of  year 

6.  Sold 

7.  Butchered 

8.  Lost 


g.  Total 

10.  Pounds  butchered. 


The  above  is  to  be  used  when  the  live  stock  is  raised  primarily 
for  sale.  If  it  is  raised  principally  for  consumption  the  informa- 
tion should  be  as  follows: 

Number  of  Head    Amount 

1.  Inventory  beginning  of  year $ 

2.  Purchases 

3.  Born  (or  branded) 

4.  Expenses 

e.  Total $ 


6.  Inventory  end  of  year. 

7.  Sold 

8.  Lost 


Total , 


10.  Butchered  (No.  5  less  No.  9) 

11.  Pounds  butchered 

12.  Cost  per  pound  butchered.  .  , 


In  the  above  schedule  the  statistics  are  arranged  with  the  idea 
of  showing  what  the  meat  consumed  has  cost.  No  amount  is 
entered  in  the  amount  column  opposite  items  3  and  8,  and  no 
amount  is  entered  in  the  number  of  head  column  opposite  item  4. 
For  comparative  purposes  two  columns,  Number  of  Head  and 
Amount,  should  be  provided  for  each  year  to  be  compared. 

Owing  partly  to  the  heavy  mortality  among  the  very  young 
animals  and  partly  to  the  convenience  of  the  method,  the  new 


234  ACCOUNTING— THEORY  AND  PRACTICE 

live  stock  "crop"  is  usually  recorded  at  the  time  the  animals  are 
branded  or  marked.  For  that  reason  item  3  above  is  entitled 
*'born  or  branded." 

Special  records  are  also  kept  for  registered,  pure-bred  stock, 
showing  register  number,  ancestry,  characteristics,  and  other 
information .  These  records  may  be  procured  in  standard  printed 
form. 

Labor  Record 

The  purpose  of  the  labor  record  is  to  distribute  the  labor  costs 
of  both  men  and  horses  to  the  various  enterprises  conducted  on 
the  farm. 

Labor  is  the  largest  item  of  farm  cost.  Its  distribution  is  also 
the  most  difRcult  of  all  the  expenses. 

It  is  impossible  to  charge  all  labor  costs  directly  to  the  activi- 
ties affected  at  the  time  the  work  is  done  for  the  reason  that  the 
total  cost  per  hour  or  day  is  not  known  at  the  time.  Take,  for 
instance,  the  work  of  a  man:  The  price  paid  for  help  is  definite 
but  the  cost  of  his  board  has  not  yet  been  determined  and  the 
cost  of  boarding  the  men  is  as  much  a  part  of  the  labor  cost 
as  wages.  Work  performed  by  the  owner  and  his  family  must 
also  be  considered  and  a  charge  made  therefore  in  the  Labor 
account.  The  problems  connected  with  horse  labor  costs  are 
similar. 

It  is,  therefore,  necessary  to  wait  until  the  end  of  the  fiscal 
period  to  make  the  entries  distributing  board  of  men  and  horse 
expense.  In  the  meantime,  however,  a  record  must  be  made  of 
the  time  spent  on  the  various  farm  activities.  In  the  case  of  men 
this  is  done  in  terms  of  man-hours  or  man-days;  in  the  case  of 
horses,  horse-hours  or  horse-days.  That  means,  for  example, 
that  2  men  and  4  horses  working  10  hours  would  make  20  man- 
hours  and  40  horse-hours. 

The  records  used  to  compile  these  data  consist  of  a  chrono- 
logical record  of  labor  performed  and  a  ledger.  The  chrono- 
logical record  may  be  illustrated  as  follows: 


RANCH  COST  ACCOUNTING  235 

Date  Nature  of  Labor                               Man-Hours     Horse-Hours 

April  I     Plowing  for  corn 10  30 

"     2     To  town  for  seed  corn 3  6 

"     2    Work  on  garden 4 

"     2     Repairing  fences 2  2 

"     3     Planting  corn 5  10 

"    3     Branding  cattle 4  2 

Each  item  is  posted  from  this  record  to  the  labor  ledger  which 
is  the  same  as  the  above  in  form  except  that  a  page  is  set  aside 
for  each  enterprise  to  which  all  labor  on  behalf  of  the  particular 
enterprise  is  posted.    For  example: 

Corn 

Date  Nature  of  Labor  Man-Hours  Horse-Hours 

April  I     Plowing  for  corn 10  30 

"     2     To  town  for  seed  corn 3  6 

"     3     Planting  corn 5  10 

When  all  items  in  the  chronological  record  have  been  posted, 
the  totals  from  the  labor  ledger  must  equal  the  total  in  the  record. 

Theoretically,  the  time  spent  on  various  jobs  should  be 
entered  daily,  but  practically  this  is  often  found  difficult.  In 
certain  cases  periodical  estimates  may  be  made  with  equal 
accuracy  and  less  work.  Take,  for  instance,  the  work  usually 
termed  "chores,"  which  consists  of  feeding  the  various  kinds  of 
stock,  milking,  etc.  The  time  consumed  in  these  various  oper- 
ations does  not  change  materially  from  day  to  day,  therefore  a 
record  may  be  made  monthly.  When  the  entry  is  made,  the 
estimated  time  spent  in  doing  chores  during  the  month  is  entered 
in  the  record  showing  the  amount  of  time  spent  in  caring  for  each 
kind  of  stock.  From  there  it  is  posted  to  the  respective  accounts 
in  the  labor  ledger. 

At  the  end  of  the  year  when  the  total  cost  of  labor  and  total 
horse  expense  have  been  determined,  the  total  man-hours  and  the 
total  horse-hours  for  the  year  divided  into  their  respective  cost 
accounts  will  give  a  rate  per  hour  for  each.     A  complete  distri- 


Man-Hours 

Horse-Hours 

9,000 

18,000 

3,000 

6,000 

1,500 

3,500 

300 

600 

•  600 

600 

2,700 

2,400 

300 

600 

150 

450 

300 

18,000 

32,000 

236  ACCOUNTING— THEORY  AND  PRACTICE 

bution  of  these  costs  can  then  be  made  by  applying  the  rates  so 
found  to  the  hours  shown  in  each  account  in  the  labor  ledger. 
Take,  for  example,  the  following  summary  of  the  labor  record: 


Corn 

Oats 

Alfalfa 

Horses 

Hogs 

Cattle 

Garden 

Repairs  (Equipment) 

Repairs  (Improvements) 


Suppose  the  total  cost  of  labor  is  $5,400  and  horse  expense 
$3,200.  Dividing  those  amounts  by  the  number  of  man-hours 
and  horse-hours  respectively,  establishes  a  rate  of  30  cents  per 
man-hour  and  a  rate  of  10  cents  per  horse-hour.  These  rates 
applied  to  the  various  farm  operations  will  give  the  cost  of  men 
and  horses  for  each  operation;  for  instance,  corn  will  show  9,000 
man-hours  at  30  cents,  or  $2,700  for  labor,  and  18,000  horse-hours 
at  10  cents,  or  $1,800  for  horses.  The  total  cost  of  men  and  horses 
in  the  production  of  the  corn  crop  will  be  $4,500. 

All  labor  may  be  grouped  as  above,  provided  there  is  no 
material  variation  in  rates  of  wages.  If  there  is  a  considerable 
difference  the  employees  should  be  classified  according  to  rate 
and  the  time  and  wages  kept  separate  so  that  varying  rates  per 
man-hour  may  be  established. 

If  the  foreman's  or  manager's  time  is  so  spent  that  it  can  be 
allocated  to  the  different  farm  activities,  his  time  should  be 
recorded  separately  in  the  manner  described  above,  arriving  at  a 
rate  per  hour  for  the  manager's  salary;  if,  however,  as  is  often  the 
case,  his  duties  are  so  divided  as  to  make  allocation  impracticable, 
it  will  be  necessary  to  apportion  it  on  some  other  basis.    Perhaps 


RANCH  COST  ACCOUNTING  237 

the  most  satisfactory  method  is  to  apportion  it  on  the  basis  of 
man-hours  from  the  labor  record. 

Where  a  tractor  or  truck  is  used,  a  record  should  be  kept  of  the 
work  performed  by  it  similar  to  the  one  for  horses.  This  can  be 
done  by  providing  another  column  in  the  labor  record  headed 
Tractor,  Truck,  or  Machine-Hours.  A  corresponding  expense 
account  should  be  carried  in  the  books.  This  divided  by  the 
machine-hours  at  the  end  of  the  year  will  give  for  purposes  of 
distribution  a  machine-hour  rate. 

Consumption  Record 

In  order  to  know  the  cost  of  producing  crops,  live  stock,  or 
other  products  it  is  necessary  to  keep  a  record  of  all  products  con- 
sumed in  producing  others.  For  instance,  grain  may  be  used 
as  seed  for  producing  a  new  crop ;  grain  and  hay  may  be  fed  to  live 
stock  to  produce  meat,  dairy  products,  wool,  horse-power,  etc. ; 
cattle,  hogs,  sheep,  and  poultry  may  be  consumed  as  food  and 
become  a  part  of  labor  cost,  and  so  on. 

Another  reason  for  keeping  such  a  record  is  to  provide  a  check 
on  the  various  products  to  be  accounted  for.  At  the  beginning 
of  the  year  the  inventory  will  show  certain  quantities  on  hand; 
during  the  year  additional  quantities  are  produced;  and  the  sum 
of  the  two  represents  the  amount  to  be  accounted  for  at  the  end 
of  the  year.  The  sales  journal  will  show  what  has  been  sold 
and  the  closing  inventory  will  show  what  remains  on  hand  at  the 
end  of  the  year.  The  difference  between  the  siun  of  these  two 
and  the  total  to  be  accounted  is  often  erroneously  regarded  as 
the  amount  consumed.  Many  things  may  account  for  this  differ- 
ence besides  ordinary  consumption;  some  of  the  crop  may  have 
been  destroyed  by  fire  or  water;  some  may  have  been  stolen; 
some  may  have  died  (in  the  case  of  live  stock),  etc.  Consider- 
ation of  these  facts  shows  something  of  the  importance  of  keeping 
a  record  of  consumption  in  order  that  losses  may  be  known. 

Still  another  reason  for  keeping  a  record  of  consumption  is 
to  show  how  the  crop  is  consumed  in  order  that  charges  may  be 


238  ACCOUNTING— THEORY  AND  PRACTICE 

made  to  the  proper  accounts.  For  instance,  wheat  may  be  used 
for  seed,  in  which  case  it  is  charged  to  Wheat  Expense,  or  it  may- 
be fed  to  horses,  in  which  case  it  is  charged  to  Horse  Expense,  or 
if  fed  to  hogs  and  chickens,  it  is  charged  to  Hogs  Expense  and 
Chicken  Expense,  respectively,  or  again  it  may  be  milled  and  the 
flour  used  for  food. 

Breeding  Record 

A  breeding  record  is  desirable  for  many  reasons,  of  which  the 
following  may  be  mentioned:  (i)  to  know  when  to  expect  deliv- 
eries; (2)  to  show  which  animals  are  good  breeders  and  which 
are  not,  and  (3)  to  have  an  original  record  of  increase  from  which 
item  3  of  the  live  stock  record  may  be  posted  or  verified.  This 
record  is  practicable  only  when  the  stock  is  closely  handled. 

The  record  should  contain  columns  headed  as  follows,  except 
in  the  case  of  registered  animals  for  which  a  full  page  is  used  for 
each  animal : 

1 .  Name  of  Female 

2.  Name  of  Male 

3.  Fee 

4.  When  Bred 

5.  When  Due 

6.  Dehvered 

7.  Sex 

Poultry  and  Egg  Record 

At  least  a  simple  record  of  poultry  operations  should  be  kept. 
A  form  for  this  purpose  is  a  sheet  with  12  horizontal  hnes,  one  for 
each  month  of  the  year,  and  ^3  vertical  columns,  one  for  each  day 
of  the  month,  one  for  the  monthly  total,  and  one  for  the  market 
value.  The  total  eggs  produced  should  be  entered  daily  in  order 
that  the  last  column  will  show  the  total  value  of  eggs  produced 
during  the  year.  The  following  information  should  be  provided 
for  at  the  bottom  of  the  page: 


RANCH  COST  ACCOUNTING  239 

Poultry  Number      Value 

1.  Stock  at  end  of  year $ 

2.  Stock  sold 

3.  Estimated  stock  eaten 

4.  Total  accounted  for $ 

5.  Stock  at  beginning  of  year 

6.  Total  produced  during  year $ 

Eggs  Dozen       Value 

1.  Eggs  sold $ 

2.  Estimated  eggs  eaten 

3.  Total  produced  during  year $ 

The  sales  in  both  summaries  are  obtained  from  the  sales 
records  and  the  number  shown  as  produced  in  the  eggs  summary 
must  agree  with  the  egg  record  described  above. 

Miscellaneous  Information 

In  addition  to  the  above  records  others  of  considerable  statis- 
tical value  may  be  compiled .  The  extent  to  which  information  of 
this  kind  is  recorded  depends  upon  its  importance  in  the  manage- 
ment of  the  farm.  For  instance,  a  miscellaneous  record  in  the 
form  of  a  blotter  or  diary  is  sometimes  kept  for  such  information 
as  the  state  of  weather,  animals  lost  by  death  or  otherwise, 
unusual  change  in  market  conditions,  etc. 

II.  Inventories 

Fiscal  Year 

The  chief  consideration  governing  the  selection  of  a  fiscal 
year  in  any  business  should  be  the  inventory.  At  the  end  of  the 
fiscal  year  inventories  must  be  taken,  and  if  there  is  any  regular 
time  during  the  year  when  the  inventory  is  lightest,  that  should 
be  chosen  as  the  end  of  the  fiscal  year  providing  there  are  no  other 
considerations  of  sufficient  importance  10  outweigh  that 
advantage. 

March  3 1  is  usually  found  a  convenient  time  to  close  the  year 


240       ACCOUNTING— THEORY  AND  PRACTICE 

on  the  farm  in  most  sections  of  the  United  States.  By  that 
time  most  of  the  preceding  year's  crops  have  been  disposed  of  and 
all  expenses  in  connection  therewith  completed,  while  but  little 
work  has  been  done  on  the  succeeding  year's  operations.  What- 
ever work  has  been  done  toward  producing  the  next  year's  crops 
should  be  carried  as  a  deferred  charge  on  the  books.  Any  early 
increase  in  live  stock  occurring  before  March  31  may  be  inven- 
toried and  considered  as  a  part  of  the  "crop  "  of  the  current  year. 
April  30  is  adopted  for  the  end  of  their  fiscal  year  by  some  of 
the  largest  breeders,  and  where  cattle  raising  is  the  chief  or  only 
operation  engaged  in,  that  date  will  usually  be  found  more 
satisfactory. 

Inventories 

Inventorying  on  the  farm  falls  naturally  into  two  classes 
and  each  of  these  classes  may  be  divided  into  two  groups,  each 
division  requiring  a  different  procedure.  The  divisions  are  as 
follows : 

1 .  Capital  Assets 

(a)  Improvements 

(b)  Equipment 

2.  Products 

(a)  Produce 

(b)  Live  stock 

Capital  Assets — Improvements 

Improvements  include  buildings,  fences,  and  work  done  to  put 
the  land  in  condition  for  use.  The  last  mentioned  item  does  not 
require  inventorying,  since  ordinarily  it  does  not  change  in 
quantity  or  value.  When  a  piece  of  land  is  broken  or  cleared  of 
rocks,  brush,  or  trees  to  make  it  tillable,  the  work  does  not  have 
to  be  done  again;  in  other  words,  it  is  not  subject  to  deterioration, 
neither  is  it  subject  to  appreciation  in  value;  therefore  the  cost 
of  such  work  is  set  up  on  the  books  as  a  capital  item  and  the  value 
is  never  changed. 


RANCH  COST  ACCOUNTING  24I 

There  are  a  few  exceptions  to  this  case,  as,  for  example,where 
the  ground  is  broken  or  cleared  and  then  allowed  to  go  back  to  its 
original  state  through  failure  to  cultivate.  In  such  cases  the  cost 
of  improving  should  be  written  off. 

Buildings  and  fences  are  subject  to  ordinary  depreciation,  the 
rate  of  which  may  be  fairly  definitely  established.  Depreciation 
of  buildings  on  the  farm  will  conform  to  the  same  rates  as  those  of 
similar  construction  elsewhere  in  the  same  climate,  and  fences 
have  a  pretty  definite  life,  depending  upon  the  kind  of  posts  and 
other  material  used.  Since  accurate  rates  of  depreciation  may  be 
applied  to  such  improvements,  they  can  best  be  inventoried  each 
year  by  the  depreciation  method. 

Equipment 

Equipment  is  subjected  to  such  a  variety  of  conditions  on  the 
farm  that  satisfactory  rates  of  depreciation  are  difficult  to  estab- 
lish. If  it  is  properly  sheltered  the  depreciation  will  be  much 
less  than  if  it  is  exposed  to  the  weather.  Machinery  will  naturally 
last  longer  when  used  on  smooth  ground  than  when  used  on 
rough  ground.  Harness  properly  oiled  and  repaired  will  outwear 
harness  not  properly  cared  for.  Another  difficulty  lies  in  the  fact 
that  the  rates  of  depreciation  vary  much  on  different  pieces  of 
equipment. 

Perhaps  the  most  satisfactory  method  under  ordinary  cir- 
cumstances is  to  appraise  the  equipment.  Not  only  will  more 
accurate  valuations  result  from  this  method  but  a  better  control 
will  be  had  on  the  equipment  to  be  accounted  for.  In  order  to 
realize  this  last  result,  the  equipment  account  should  be  analyzed 
and  the  articles  listed  alphabetically.  This  can  be  done  by 
merely  writing  down  the  names  of  the  various  articles  and  provid- 
ing three  columns,  one  for  the  insertion  of  the  quantities  to  be 
accounted  for  according  to  the  equipment  account,  one  for  the 
inventory  account ,  and  one  for  the  values .  After  the  inventory  is 
taken,  the  first  column  should  be  filled  in  and  compared  with  the 
quantities  shown  by  the  count.     In  this  way  losses  or  other 

VOL.   HI 16 


242  ACCOUNTING— THEORY  AND  PRACTICE 

discrepancies  will  be  detected  and  a  control  exercised  over  all 
equipment. 

This  procedure  will  be  facilitated  by  keeping  a  card  record  on 
equipment,  a  card  being  used  for  each  kind  of  machinery  or  tool. 
New  equipment  bought  should  be  posted  to  these  cards  so  that 
they  will  always  agree  in  aggregate  with  the  equipment  account  in 
the  ledger.  A  list  for  inventory  purposes  can  be  readily  prepared 
from  the  cards. 

When  the  appraisal  of  equipment  has  been  completed,  the 
difference  between  the  cost  and  the  appraised  value  should  be  set 
up  as  a  Depreciation  Accrued  account  and  not  entered  in  the 
Equipment  account.  The  reason  for  this  is  the  same  as  for  setting 
up  in  separate  accounts  the  depreciation  of  assets  arrived  at  by 
the  percentage  method. 

Farm  Produce  Inventory 

In  inventorying  produce,  i.e.,  grain,  hay,  vegetables,  fruit,  etc., 
either  of  two  bases  of  valuation  may  be  taken ;  cost  or  market  value. 

If  the  valuation  is  based  on  cost,  the  price  per  unit  will  include 
all  direct  and  overhead  expenses  incident  to  putting  the  product 
into  the  shape  it  is  at  inventory  time,  and  will  be  arrived  at  as 
follows,  where  none  of  the  inventory  at  the  beginning  of  the 
year  remains  at  the  end  of  the  year: 

Quantity 

Bushels  Cost  per  Unit    Total  Cost 

1.  Inventory  beginning  of  year. .        i,ooo  $1.50  $1,500.00 

2.  Produced  during  year 3,000  i. 


3.  Total 4,000  $1 

4.  Sales  from  old  stock 800  $1 

5.  Used  from  old  stock 200  i 

6.  Sales  from  new  stock 500  i 

7.  Used  from  new  stock 500  i 

8.  Total 2,000  $1 


g.  Inventory  end  of  year 2,000  $1 


75 5,250.00 


68^    $6,750.00 


50  $1,200.00 

SO  300.00 

75  875.00 

75 875.00 


62i 


^2  $3,250.00 


75 $3,500.00 


RANCH  COST  ACCOUNTING  243 

Since  it  is  known  that  none  of  the  inventory  at  the  beginning 
of  the  year  remains  on  hand,  the  inventory  at  the  end  of  the  year  is 
all  figured  at  $1 .75  per  bushel,  the  cost  of  producing  the  new  crop. 

Where  a  part  of  the  inventory  at  the  beginning  of  the  year 
remains  on  hand  allowance  should  be  made  for  any  differences  in 
value  unless  the  inventory  at  the  beginning  of  the  year  is  in- 
distinguishable from  that  produced  during  the  year  in  which  case 
it  is  necessary  to  get  an  average  cost  and  use  this  for  both  the 
stocks  disposed  of  and  those  remaining  on  hand. 

From  the  above  it  will  be  seen  that  either  of  three  results  may 
be  obtained  in  handling  the  same  quantities  and  costs,  depending 
upon  the  manner  of  handling  the  stocks. 

As  stated  above,  the  inventory  values  may  be  based  upon 
market  value;  that  is  to  say,  from  the  market  value  a  figure 
representing  the  value  in  the  hands  of  the  producer  is  obtained. 
The  produce  on  hand  is  not  worth  what  it  can  be  sold  for  because 
the  farmer  will  have  to  pay  for  loading  and  transporting  it  to 
market,  perhaps  pay  a  commission  to  a  broker,  and  suffer  some 
loss  through  spoilage,  shrinkage,  etc.  So  in  order  to  place  a  fair 
valuation  on  the  unmarketed  product  it  is  necessary  to  estimate 
all  costs  which  will  subsequently  be  borne  in  the  process  of  mar- 
keting and  deduct  these  from  the  market  price  at  the  date  of 
inventory. 

The  chief  objection  to  this  method  is  that  it  anticipates  a 
profit.  If  the  price  determined  by  the  market  value  method  is 
greater  than  the  actual  cost  of  production,  a  profit  representing 
this  difference  will  be  reflected  in  the  income  of  this  period 
although  the  produce  remains  unsold. 

Where  accurate  costs  have  been  kept,  the  cost  basis  of  inven- 
torying is  preferable  but  in  case  this  method  cannot  be  used  it 
is  advisable  to  deduct  a  certain  amount,  say  10%,  from  the  value 
determined  by  the  market  price  method.  This  will  have  the 
eft'ect  of  deferring  at  least  a  part  of  the  anticipated  profits  to  the 
subsequent  year  where  they  properly  belong,  and  at  the  same 
time  create  a  reserve  for  unexpected  losses  and  expenses. 


244  ACCOUNTING— THEORY  AND  PRACTICE 

Live  Stock 

Live  stock  presents  a  peculiar  problem  in  that  the  growing 
animals  represent  unfinished  products,  the  cost  of  which  cannot 
be  satisfactorily  determined.  In  the  case  of  grain,  hay,  and  other 
produce  the  crop  is  planted,  matured,  and  the  finished  product 
harvested  all  within  the  year,  but  with  live  stock,  expenses  are 
incurred  in  taking  care  of  the  herd  as  a  whole  and  at  the  end  of  the 
year  the  inventory  shows  animals  of  various  ages  but  the  cost  of 
producing  the  different  classes  is  difficult  to  determine.  Mature 
breeding  animals  have  been  fed  through  the  year  but  the  cost  of 
feed  and  care  cannot  be  added  to  their  value  at  the  beginning  of 
the  year;  as  a  matter  of  fact  they  may  have  actually  depreciated 
due  to  age  or  other  cause,  but  they  will  seldom  increase  in  value 
except  through  market  changes  which,  of  course,  do  not  affect 
costs.  Animals  being  prepared  for  market  increase  in  value 
usually  in  proportion  to  their  added  weight.  Younger  animals 
increase  in  size  and  value  but  they  have  perhaps  not  consumed 
as  much  feed  as  the  mature  ones .  Young  ones  have  been  produced 
which  have  a  value  although  they  have  entailed  no  direct  cost. 

Let  us  see  if  the  cost  of  raising  live  stock  can  be  equitably 
allocated  to  the  various  classes.  Take  first  the  cost  of  feeding 
and  caring  for  the  mature  breeding  animals.  As  stated  above, 
nothing  is  added  to  their  value;  therefore,  the  expense  must  be 
charged  to  some  other  account.  It  does  not  add  to  the  value  of 
the  growing  animals  and  if  it  is  strictly  a  breeding  herd  it  does  not 
produce  any  income  other  than  the  young  ones;  therefore  all  these 
expenses,  including  depreciation  of  the  breeding  herd,  are  prop- 
erly charged  to  the  cost  of  producing  the  increase  in  the  herd. 

Next  let  us  consider  the  cost  of  feeding  and  caring  for  the 
mature  animals  which  are  being  prepared  for  the  market.  All 
such  expenses  unquestionably  represent  the  cost  of  producing  the 
marketable  animals,  just  as  labor  and  expenses  are  applied  to  any 
raw  material  to  produce  the  finished  article.  In  other  words,  it  is 
a  manufacturing  operation  and  the  cost  of  caring  for  such  animals 
is  a  manufacturing  cost. 


RANCH  COST  ACCOUNTING  245 

The  cost  of  caring  for  growing  animals  for  a  year  or  any  other 
period  represents  a  part  of  the  manufacturing  cost  necessary  to 
complete  the  operation.  In  other  words,  they  are  "goods  in 
process"  that  have  gone  through  one  stage  of  production  but 
have  not  reached  thejpoint  of  completion.  The  cost  may  therefore 
be  properly  added  to  the  inventory  value  at  the  beginning  of  the 
year  to  get  the  value  at  the  end. 

As  stated  above,  young  animals  produced  during  the  year 
have  entailed  no  direct  expense,  such  as  feed,  etc.;  hence  their 
inventory  value  would  be  merely  the  cost  of  maintaining  the 
breeding  herd. 

Animals  kept  neither  for  the  purpose  of  breeding  nor  for  sale 
in  the  market,  such  as  work  horses  or  dairy  cows,  are  in  a  different 
class  entirely,  inasmuch  as  they  are  not  directly  employed  in  the 
production  of  finished  animals  for  the  market.  The  horses,  for 
example,  are  employed  in  raising  crops,  caring  for  other  animals, 
etc.  The  expenses  are  allocated  to  these  operations  and  con- 
stitute a  part  of  the  cost  thereof  and  do  not  affect  the  inventory 
value  of  the  horses. 

Any  colts  produced  by  work  mares  or  calves  produced  by 
dairy  cows  are  merely  by-products  and  may  be  treated  as  such  by 
allocating  to  them  a  proper  portion  of  the  cost  of  maintaining 
the  producing  herd.  This  will  operate  as  a  reduction  of  the  costs 
chargeable  to  crops,  dairy  products,  or  other  operations  in  which 
the  producing  animals  are  employed. 

Another  somewhat  similar  but  more  difficult  problem  is 
presented  in  the  case  of  growing  animals  employed  in  other 
operations.  Where  such  animals  are  not  used  for  other  purposes 
all  costs  of  raising  may  be  capitalized  by  being  added  to  the  value 
of  the  animals,  but  where  they  are  otherwise  employed  a  part  of 
such  costs  should  be  charged  to  the  operation  in  which  they  are 
used. 

For  instance,  if  a  2-year  old  heifer  bears  a  calf,  there  has  been 
an  income  due  to  such  increase  and  also  an  income  due  to  the 
growth  of  the  heifer.    If  she  had  not  borne  the  calf,  all  cost  of 


246  ACCOUNTING— THEORY  AND  PRACTICE 

maintaining  her  would  have  been  added  to  her  value  at  the 
beginning  of  the  year  to  get  her  value  at  the  end  of  the  year.  If 
the  calf  had  been  produced  by  a  full-grown  cow  all  the  cost  of 
keeping  the  cow  during  the  year  would  have  been  capitaUzed 
as  the  inventory  value  of  the  calf.  But  here  we  have  one  animal 
producing  a  double  income  neither  part  of  which  is  affected  by  the 
other,  yet  if  we  take  actual  cost  for  the  purpose  of  inventory  the 
value  of  either  the  heifer  or  the  calf  or  both  must  be  understated. 

From  the  above  it  will  be  seen  that  all  animals  used  on  the  farm 
may  be  divided  into  two  general  classes:  those  in  process  of 
development,  and  those  not  in  process  of  development.  The 
former  includes  growing  animals  and  mature  animals  which  are 
being  prepared  for  market.  The  latter  includes  all  other  mature 
animals.  The  former  represents  animals  that  are  increasing  in 
value  while  the  latter  represents  those  used  as  equipment  and  is 
analogous  to  machinery  in  a  factory. 

With  the  exception  of  instances  such  as  those  discussed 
above  where  certain  animals  belong  in  both  classes,  the  theory  of 
using  actual  costs  for  the  purposes  of  inventorying  live  stock 
seems  satisfactory;  yet  a  practical  application  of  the  theory  is 
dependent  upon  the  ability  to  determine  what  the  costs  are  of 
developing  or  maintaining  the  two  classes  and  their  respective 
groups.  It  must  be  possible  to  ascertain  the  costs  apphcable  to 
the  following  groups: 

Class  I .  In  process  of  development : 

(a)  Growing  animals  (this  group  to  be  subdivided  if  the 

cost  is  different  for  maintaining  animals  of  different 
ages). 

(b)  Mature  animals  being  prepared  for  market. 
Class  2 .  Not  in  process  of  development : 

(a)  Breeding  animals. 

(b)  Mature  animals  used  for  other  purposes. 

If  the  cost  of  each  of  these  groups  can  be  determined  then  it 
will  be  possible  to  inventory  by  the  cost  method  but  the  difficulty 


RANCH  COST  ACCOUNTING  247 

of  accurately  dividing  the  costs  in  this  manner  renders  the  cost 
method  unpopular.  It  is  usually  necessary  to  estimate  the 
expenses  applicable  to  each  group  since  they  are  seldom  physi- 
cally divided  as  classified  above.  Group  (b)  of  class  2  above 
represents  the  portion  of  the  live  stock  the  cost  of  which  is  an 
expense;  the  cost  of  the  other  groups  is  capitalized  in  the  inven- 
tory. Since  under  ordinary  conditions  group  (b)  of  class  2  must 
be  estimated,  it  follows  that  not  only  must  the  cost  of  each  of  the 
other  groups  be  at  least  partially  estimated,  but  the  total  cost  to 
be  capitalized  is  also  an  estimate.  Add  to  this  the  difficulty  of 
inventorying  where  the  animals  fall  into  two  classes  and  it  will  be 
seen  that  the  cost  plan  of  inventorying  is  difficult  of  application. 
It  should  not  be  considered  impossible,  however,  and  under 
certain  conditions  the  principle  can  be  quite  satisfactorily  applied. 

Too  often  this  theory  is  applied  to  the  extent  of  adding  as 
additional  cost  all  expenses  incident  to  a  certain  class  of  live 
stock  without  allocating  them  to  the  different  groups ;  that  is  to 
say,  without  determining  a  unit  cost.  The  result  is  that  when 
some  animals  are  sold  it  is  impossible  to  determine  their  cost 
except  by  arbitrary  estimate. 

Another  method  of  inventorying  live  stock  that  has  gained 
considerable  favor,  due  to  its  simplicity,  is  that  of  basing  inven- 
tory value  upon  market  value.  By  referring  to  market  quo- 
tations the  farmer  can  determine  with  reasonable  accuracy  the 
price  at  which  he  is  able  to  sell  each  class  and  grade  of  stock  he 
has  on  hand.  From  this  price  should  be  deducted  the  estimated 
cost  of  marketing,  including  freight,  handling,  commission,  etc. 

The  objection  to  this  method  is  that  it  anticipates  a  profit. 
If  the  market  value  is  in  excess  of  the  cost,  a  "paper  profit"  is 
reflected  in  the  income  of  the  period  which  is  contrary  to  good 
accounting  practice.  On  the  other  hand  cost  may  be  greater 
than  the  market  value,  in  which  case  profits  are  overstated  if  the 
inventory  is  taken  on  the  cost  basis. 

As  will  be  seen,  there  are  difficulties  in  any  method  that  may 
be  adopted.    The  simplicity  of  the  market  value  method  recom- 


248  ACCOUNTING— THEORY  AND  PRACTICE 

mends  it  for  general  use  although  it  is  not  altogether  correct  in 
theory;  the  theoretical  correctness  of  the  cost  method  appeals  to 
the  accountant  and  is  undoubtedly  preferable  where  operating 
conditions  render  it  practicable.  It  may  be  argued  in  favor  of 
the  formed  that  in  the  absence  of  radical  fluctuations  in  prices, 
the  profit  due  to  natural  growth  of  live  stock  is  a  legitimate 
accrual  of  profit  which  may  as  properly  be  included  in  the  income 
of  the  period  as  the  accrual  of  interest.  This  method  has  received 
the  sanction  of  the  Treasury  Department  of  the  government  in 
recent  rulings  in  connection  with  income  tax  returns. 

In  conclusion,  it  should  be  stated  that  where  it  is  possible  to 
obtain  costs,  in  order  to  conform  to  the  best  accounting  practice, 
the  cost  should  be  compared  with  the  market  value  and  the  lower 
of  the  two  used  as  the  inventory  figure. 

Range  Cattle 

The  matter  of  count  is  not  a  problem  of  any  great  moment, 
though  this  is  not  always  the  case.  In  certain  large  ranches  in  the 
Rocky  Mountain  region  of  the  United  States  the  annual  round-up 
is  the  only  means  by  which  an  actual  count  of  cattle  may  be 
made.  These  ranges  are  so  vast  that  a  thorough  roimd-up  is 
seldom,  if  ever,  made.  Sometimes  the  ranges  include  what  are 
known  as  "winter  range,"  meaning  a  range  where  live  stock  can 
maintain  themselves  through  the  winter.  Where  there  is  a 
winter  range  less  care  is  taken  in  the  round-up  for  the  reason  that 
if  any  are  overlooked  they  will  be  counted  in  the  spring  round-up. 

Since  under  these  circumstances  a  physical  count  is  impossible 
it  becomes  necessary  to  arrive  at  an  estimated  inventory.  The 
estimated  inventory  must  of  necessity  be  based  upon  experience 
and  percentages  used  in  accordance  therewith. 

Iwo  things  must  be  estimated:  births  and  deaths.  In  esti- 
mating births  two  rates  must  be  used,  one  for  cows  and  one  for 
heifers,  since  the  number  of  calves  borne  by  2-year  old  heifers  is 
much  less  than  cows.  In  estimating  births,  it  is  also  necessarj'^ 
to  estimate  the  percentage  of  males  and  females.    Half-and-half 


RANCH  COST  ACCOUNTING  249 

is  generally  the  proportion  used.  This  may  vary  between  seasons 
but  an  average  of  several  years  will  show  that  this  percentage  is 
about  correct.  Several  rates  must  be  used  in  estimating  deaths. 
One  will  apply  to  calves,  another  to  yearlings,  another  to  2-year 
old  heifers,  another  to  2-year  old  steers,  another  to  cows  3  years 
old  and  over,  and  another  to  steers  of  the  same  age. 

The  rate  of  mortality  is  about  the  same  for  both  sexes  until 
the  age  of  2  years,  when  the  heifers  begin  bearing;  after  this  the 
rate  of  mortality  is  greater  among  the  females. 

Where  herds  of  this  kind  are  kept,  in  order  to  keep  up  the 
standard  of  the  stock  a  breeding  herd  of  pure-bred  or  graded 
cattle  is  sometimes  maintained.  This  breeding  herd  is  kept  close 
in  hand  and  is  not  turned  out  on  the  range,  but  each  year  a  certain 
number  of  young  cows  and  bulls  are  selected  from  this  herd  and 
turned  loose  with  the  range  herd.  In  addition  to  these,  other 
cattle  are  sometimes  bought  and  turned  out  on  the  range.  So 
there  may  be  three  sources  from  which  the  range  herd  is  in- 
creased, namely,  natural  increase  (births),  pure-breds,  and  cattle 
purchased. 

In  order  to  keep  as  accurate  a  record  as  possible  upon  which 
dependable  percentages  may  be  based  for  the  purpose  of  inven- 
tory a  distinctive  brand  is  sometimes  used  for  each  of  these 
classes,  in  addition  to  the  owner's  brand.  When  calves  are 
branded  the  last  figure  of  the  year  is  sometimes  used.  For  in- 
stance if  the  owner's  brand  is  on  the  right  side,  and  the  calf  was 
born  in  192 1,  a  figure  "  i "  may  be  placed  on  the  right  hip,  the 
next  year's  calves  are  branded  with  a  figure  *'  2  "  and  so  forth. 
By  keeping  a  record  of  these  brands  in  subsequent  round-ups  a 
normal  percentage  of  loss  may  soon  be  established. 

Before  leaving  the  subject  of  inventorying  live  stock  it  should 
be  stated  that  so  far  as  actual  practice  is  concerned  the  course 
most  generally  pursued  by  stockmen,  especially  western  stock- 
men, is  not  to  bother  about  the  inventory  so  far  as  their  financial 
books  are  concerned.  Their  original  investment  and  any  addi- 
tions through  purchase  are  carried  on  the  books,  but  all  subsequent 


250  ACCOUNTING— THEORY  AND  PRACTICE 

expenditures  for  feed  and  care  are  treated  as  current  expenses 
and  natural  increase  is  treated  as  income  and  taken  up  on  the 
books  only  when  sold.  When  sales  are  made  from  the  original 
herd  or  those  subsequently  purchased  the  cost  is  deducted  from 
the  investment  and  charged  against  the  gross  profits  from  the  sale. 

It  will  be  readily  seen  that  this  course  will  eventually  lead 
to  the  point  where  the  original  herd  will  all  be  disposed  of  and 
charged  off  and  in  the  meantime  an  entirely  new  herd  will  have 
been  built  up,  perhaps  larger  than  the  original  one,  but  the  asset 
will  not  be  carried  on  the  books. 

This  method  is  mentioned  because  of  its  prevalence  among 
large  stockmen  and  to  point  out  its  fallacy.  Agricultural  and 
live  stock  accounting  really  began  its  development  after  the 
federal  income  tax  law  affecting  them  was  enacted.  Many  are 
now  adopting  more  scientific  methods,  and  development  in  this 
direction  will  undoubtedly  continue  in  the  future  regardless  of  the 
course  of  income  tax  laws,  for  stockmen  are  beginning  to  see  the 
advantage  of  the  better  methods,  from  a  management  standpoint. 

Closing  the  Books 

In  closing  the  books,  care  must  be  taken  to  adjust  and  close 
the  accounts  in  the  proper  order  since  in  so  many  cases  the  results 
of  one  operation  are  incorporated  in  and  become  a  part  of  another. 
The  following  outline  is  given  as  a  general  guide  which  in  practice 
may  be  modified  and  amplified  to  meet  the  operating  conditions 
of  the  case  in  hand. 

III.  Closing  Entries 


(i)  Sundry  "Expense"  Accounts,  etc $ 

Sundry  "  Consumed"  Accounts $ 

To  set  up  entry  covering  produce  and  live 
stock  consumed  as  per  consumption 
record. 

The  quantities  consumed  are  resolved  to  money  value  by 
applying  the  average  of  the  market  prices  prevailing  during  the 


RANCH  COST  ACCOUNTING  251 

year,  less  the  estimated  cost  of  marketing.  This  is  necessary  for 
two  reasons :  first,  because  the  cost  of  producing  the  current  year's 
crops  has  not  yet  been  determined  (it  will  be  noted  that  this  entry 
adds  to  that  cost  through  some  of  the  expense  accounts  affected) ; 
second,  because  the  cost  to  produce  an  article  used  in  producing 
another  is  not  a  fair  price  to  be  used. 

Take,  for  instance,  corn-fed  cattle.  The  com  has  a  definite 
market  value  at  which  it  can  be  sold.  If  it  costs  75%  of  the 
selling  price  to  produce  it,  the  Cattle  account  is  getting  the  benefit 
of  that  profit. 

Suppose  corn  costing  $1,500  to  produce  and  having  a  mar- 
ket value  of  $2,000  was  fed  to  cattle  and  charged  at  cost. 
Suppose,  also,  that  the  Cattle  account  at  the  end  of  the 
year  shows  $300  profit.  Apparently  cattle  raising  is  profitable. 
But  suppose  the  corn  is  charged  at  the  price  at  which  it  could 
have  been  sold.  Then  the  Cattle  account  would  show  $200 
loss  and  that  represents  the  actual  result,  for  in  charging  the 
feed  at  cost  the  loss  on  cattle  has  been  offset  against  the  prof- 
it on  the  feed.  In  order  to  tell  which  operations  are  profit- 
able and  which  are  not,  all  produce  and  live  stock  consumed 
should  be  charged  at  market  price,  less  the  estimated  cost  to 
market. 

(3)  Sundry  "Summary"  and  "Expense"  Accounts. .. .  $ 

Sundry  "  Inventory  "  Accounts $ 

To  close  the  beginning  inventories  into 
the  summary  accounts,  etc.,  as:  Horses 
Summary,  Cattle  Summary,  Oats  Sum- 
mary, Alfalfa  Hay  Summary,  etc., 
which,  as  the  names  indicate,  are  used 
to  gather  together  all  accounts  affecting 
the  amount  and  value  of  live  stock  or 
produce.  Also  to  close  beginning  inven- 
tories of  supplies  and  garden  produce 
into  the  expense  accounts  to  which  they 
are  chargeable,  as  potatoes,  fence  posts, 
repair  parts  for  machinery,  etc. 


252  ACCOUNTING— THEORY  AND  PRACTICE 

(3)  Sundry  "Summary"  Accounts 

Sundry  "Purchase"  Accounts ^ 

To  close  the  latter  accounts  in  which  are 
recorded  purchases  of  live  stock  and 
produce. 

(4)  Sundry  "Sales"  Accounts  (except  garden  produce, 

see  entry  10) 

Sundry  "  Summary  "  Accounts 

To  close  former  accounts  in  which  are  re- 
corded sales  of  live  stock  and  produce. 

(5)  Sundry  "  Consumed  "  Accounts 

Sundry  "Summary  "  Accounts 

To  close  the  former  accounts. 

(6)  Sundry  "Expense"  Accounts,  etc.    (This  is  an  in- 

clusive term  used  to  represent  the  various 

accounts  to  be  debited.) 

Sundry    "Produce"     Summary     Accounts 

(This  is  an  inclusive  term  used  similarly.)  

For  produce  unaccounted  for. 

After  taking  into  account  the  produce  of  each  kind  accounted 
for,  e.g.,  oats,  wheat,  hay,  potatoes,  etc.,  it  will  usually  be  found 
that  there  is  a  balance  unaccounted  for,  or  possibly  it  may  be 
overaccounted  for.  This  is  due  partly  to  natural  shrinkage  but 
more  often  to  inaccurate  measurements  or  estimates  of  amounts 
consumed.  This  difference,  however,  should  be  very  small.  If 
it  is  large,  a  careful  analysis  should  be  made  of  the  produce 
account  in  which  the  shortage  occurs,  the  cause  determined,  and 
entries  made  charging  the  proper  accounts.  If  the  difference  is 
normal,  an  entry  should  be  made  as  above,  charging  the  various 
accounts  in  proportion  to  the  quantities  consumed  per  the  con- 
sumption record.  This  is  on  the  theory  that  the  difference  is 
most  likely  due  to  errors  in  estimating  consumption. 

The  figures  to  be  used  in  the  entry  are  arrived  at  as  follows, 
this  being  an  illustration  of  the  calculation  to  be  made  for  each 
product: 


RANCH  COST  ACCOUNTING  253 


Inventory  at  beginning  of  year  (per  Inven- 
tory account) 

Purchases  (from  purchase  accounts) 

Produced  (from  crop  record) 

Total  to  be  accounted  for 

Sold  (from  Sales  account) 

Consumed  (from  consumption  record) 

Otherwise    accounted    for    (from    general 
journal) 

Total  accounted  for 

Unaccounted  for 


This  should  be  reduced  to  money  value  for  the  purpose  of 
journalizing  by  applying  the  price  per  unit  used  in  the  inventory 
at  the  beginning  of  the  year.  This  is  necessary  for  the  reason 
that  the  cost  of  producing  the  current  year's  crops  has  not  yet 
been  determined. 

(7)  Horses  Inventory $ 

Horses  Summary $ 

To  set  up  closing  inventory  of  horses. 

Horses  in  this  particular  case  are  assumed  to  be  kept  primarily 
for  the  purpose  of  work;  and  they  are  therefore  considered  as 
equipment  and  similarly  appraised.  Other  live  stock  and  the 
various  produce  inventories  are  not  set  up  at  this  point  in  the 
process  of  closing  because  they  will  be  inventoried  at  cost,  and  the 
cost  has  not  yet  been  determined. 

(8)  Sundry  Produce  "Expense"  Accounts $ 

Sundry  Live  Stock  "Expense"  Accounts. . .  $ 

To  credit  the  several  classes  of  live  stock 
and  charge  the  crop  accounts  with  the 
value  of  manure  used  as  fertilizer. 

The  United  States  Department  of  Agriculture  in  bulletin  511 
names  $1  per  ton  as  a  fair  value. 

(9)  Horses  Expense $ 

Horses  Summary $ 

To  close  the  latter  account. 


254  ACCOUNTING— THEORY  AND  PRACTICE 

Ordinarily  there  will  be  a  debit  balance  in  this  account,  since 
work  horses  will  usually  be  subject  to  depreciation  but  never  to 
appreciation.  This  is  on  the  theory  that  equipment  should  never 
be  appreciated  on  the  books  since  it  is  not  subject  to  sale  in  the 
ordinary  course  of  business  and  therefore  a  profit  cannot  be 
realized.  An  exception  to  this  is  the  case  of  young  horses  which 
increase  in  value  through  growth.  If  such  increase  together  with 
the  profit  on  sales  more  than  equals  the  depreciation,  the  balance 
of  the  Horses  Summary  account  will  be  on  the  credit  side,  in 
which  case  the  entry  above  will  be  reversed.  Horses  Summary 
account  is  closed  at  this  point  because  it  enters  into  expense  of 
maintaining  the  horses,  which  expense  in  turn  enters  into  the 
cost  of  other  live  stock  and  produce. 


(lo)  Garden  Produce  Sold 

Garden  Expense 

To  close  the  former  account. 


This  is  based  upon  the  assumption  that  the  garden  is  kept 
primarily  for  the  purpose  of  providing  food  and  not  of  raising 
produce  for  sale.  The  profit  on  any  sales  therefore  is  treated 
as  a  reduction  of  the  expense  of  raising  the  garden. 

The  profit  might  be  treated  as  an  income  item  and  so  shown 
in  the  profit  and  loss  statement,  but  if  this  is  done  the  cost  of  the 
produce  sold  should  be  credited  to  Garden  Expense  and  be  shown 
as  a  deduction  from  the  sale  on  the  profit  and  loss  statement,  in 
order  to  show  the  net  profit  from  the  sale.  The  determination  of 
the  cost  is  quite  difficult,  if  not  impossible,  and  it  is  therefore 
preferable  to  treat  it  as  above. 

If  the  garden  is  raised  primarily  for  the  purpose  of  selling 
produce,  a  record  should  be  kept  of  the  amount  consumed  and 
an  entry  made  charging  Garden  Produce  Consumed  and  crediting 
Garden  Produce  Summary  at  market  value,  the  latter  account 
being  treated  similarly  to  the  other  summary  accounts  above,  the 
final  balance  representing  the  profit  on  the  garden.    In  this  case 


RANCH  COST  ACCOUNTING  255 

Garden  Produce  Consumed  is  closed  in  the  House  Expense  as  a 
part  of  the  cost  of  food. 

(11)  Income  from  Breeding $ 

Sundry  Live  Stock  "Expense"  Accounts. .  $ 

To  close  former  account. 

It  is  assumed  in  this  case  that  males  maintained  for  breeding 
purposes  are  primarily  for  use  of  the  owner  and  income  derived 
from  breeding  fees  is  therefore  treated  as  an  offset  to  the  expense 
of  the  herd. 

(12)  Sundry  Miscellaneous  "Inventory"  Accounts. ...  $ 

Sundry  "Expense"  Accounts $ 

To  set  up  inventories  of  supplies  and 
garden  produce. 

(13)  Sundry  Grain  "  Expense  "  Accounts 

Sacks 

To  distribute  cost  of  sacks  in  proportion 
to  their  use. 

Sacks  are  bought  for  use  in  handling  various  kinds  of  grain. 
At  the  time  of  purchase  it  cannot  be  foreseen  for  which  grain 
they  will  be  used.  Therefore,  it  is  necessary  to  charge  them  to  a 
Sacks  account  and  to  distribute  the  charge  as  above  when  they 
are  used.  If  any  sacks  are  left  on  hand  these  should  be  taken 
into  account  by  distributing  the  balance  in  the  account,  less  the 
value  of  the  inventory  which  will  be  entered  later. 

(14)  Sundry  "  Expense  "  Accounts $ 

House  Expense $ 

To  charge  certain  expense  accounts  with 
cost  of  board  on  the  basis  of  the  labor 
record. 

As  previously  explained  the  cost  of  board  cannot  be  distrib- 
uted at  the  time  the  pay-roll  is  distributed  for  the  reason  that 
the  cost  is  not  known  at  that  time. 

At  this  point,  in  the  process  of  closing,  we  still  have  not 
ascertained  the  cost  of  board.  It  now  becomes  necessary  to 
estimate  it  in  order  to  close  certain  expense  accounts  which  enter 


256  ACCOUNTING— THEORY  AND  PRACTICE 

into  the  cost  for  the  current  year.  For  instance,  time  has  been 
spent  in  caring  for  horses  but  the  cost  of  boarding  the  men  during 
this  time  has  not  been  charged  to  Horses  Expense.  Horses  have 
been  used  in  making  garden  so  Garden  Expense  should  be  charged 
with  its  proportionate  part  of  the  total  Horses  Expense;  Garden 
Expense  is  one  of  the  accounts  that  go  to  make  up  House  Ex- 
pense which  represents  the  cost  of  board. 

This  illustrates  why  it  is  necessary  to  estimate  the  board  for 
the  purpose  of  closing  those  accounts  which  go  to  make  up  the 
house  expense  for  the  current  year.  The  preceding  year's  cost 
for  board  per  man-hour  will  usually  be  found  the  most  satis- 
factory, but  if  there  are  circumstances  which  will  make  the  rate 
inequitable  it  may  be  estimated  on  a  different  basis. 

The  accounts  to  be  charged  with  board  at  this  point,  as 
indicated  by  the  above  entry,  are  only  those  which  will  eventually 
be  closed  into  the  House  Expense  account,  and  any  accounts  that 
will  otherwise  affect  the  House  account.  Ordinarily  there  will  be 
none  of  the  latter  class,  except  Horses  Expense. 

(15)  Sundry  "Expense"  Accounts,  etc $ 

Manager 's  Salary $ 

To  charge  the  various  accounts  with  the 
manager's  salary  on  basis  of  man-hours 
per  labor  record. 

(16)  Sundry  "Depreciation"  Accounts 

Sundry  "  Depreciation  Accrued  "  Accounts  

To  set  up  depreciation  on  equipment  and 
improvements. 

The  various  depreciation  expense  accounts  are  kept  separate 
because  some  enter  into  the  cost  of  one  product  and  some  another. 

(17)  Garden  Expense $ 

Depreciation  on  garden  equipment. 

Irrigating  Expense 

Depreciation  on  irrigating  equipment.  .$ 

Depreciation  on  flumes  and  pipelines 

Total $ 


RANCH  COST  ACCOUNTING  257 

Sundry  Live  Stock  "Expense"  Accounts 

Charging  the  various  live  stock  accounts  with 
the  depreciation  on  improvements  and 
equipment  used  in  their  behalf. 

Profit  and  Loss 

Depreciation  on  fences $ 

Depreciation  on  telephone  lines 

Depreciation  on  general  equipment 

Total $ 

Sundry  "  Depreciation"  Accounts $ 

To  close  latter  accounts. 

The  following  depreciation  accounts  should  not  be  closed  in 
this  entry  as  they  will  be  handled  in  subsequent  entries: 

Depreciation  on  Grain  Equipment 

Depreciation  on  Hay  Equipment 

Depreciation  on  Plowing  and  Harrowing  Equipment 

Depreciation  on  House  Equipment 

Depreciation  on  Houses 

(18)  Sundry  "  Expense  "  Accounts $ 

Interest  on  Investment $ 

To  charge  the  various  expense  or  cost  ac- 
counts with  interest  on  the  investment 
in  property  used. 

For  instance,  if  100  acres  are  devoted  to  a  certain  crop, 
interest  on  the  value  of  that  land  should  be  charged  to  that  crop 
as  should  also  the  interest  on  the  value  of  the  equipment.  Simi- 
larly interest  on  the  value  of  the  horses  should  be  charged  to 
Horse  Expense.  In  making  this  entry,  the  interest  on  the  entire 
invested  capital  should  be  distributed.  This  is  important  in 
order  to  show  whether  or  not  the  various  enterprises  engaged  in 
are  paying  more  than  the  interest  on  the  money  invested,  or 
whether  or  not  this  may  be  true  of  the  entire  farm.  Interest 
on  capital  invested  in  assets  other  than  land,  improvements, 
equipment,  and  live  stock  may  be  charged  to  General  Farm 
Expense  since  the  attempt  required  to  allocate  it  to  the  various 
operations  would  hardly  be  justified. 

VOL.  Ill — 17 


258  ACCOUNTING— THEORY  AND  PRACTICE 

Theoretically  the  average  investment  during  the  year  should 
be  taken,  but  in  the  absence  of  radical  changes  the  preceding 
balance  sheet  may  be  used  as  the  basis  for  calculation. 

(19)  Horse  Expense $ 

Sundry  "Repairs"  Accounts $ 

To  close  accounts  representing  repairs  of 
improvements  and  equipments  used  for 
or  on  account  of  horses. 

(20)  Sundry  "  Expense  "  Accounts,  etc 

Horse  Expense 

Distributing  horse  expense  on  the  basis 
of  horse-hours  or  days  as  shown  by  the 
labor  record. 

The  rate  to  be  applied  to  the  horse-hours  shown  there  is 
obtained  by  dividing  horse  expenses  by  the  total  horse-hours. 

(21)  Chicken  Summary $ 

Chicken  Expense $ 

To  close  latter  account. 

(22)  House  Expense 

Chicken  Summary 

To  close  latter  account. 

If  a  proper  record  has  been  kept  of  chickens  and  eggs  con- 
sumed, the  balance  in  this  account  should  be  small,  but  there 
will  always  be  a  balance  due  partly  to  the  credit  of  eggs  produced 
and  partly  to  the  fact  that  the  chickens  consumed  have  been 
figured  at  last  year's  prices. 

(23)  Garden  Expense $ 

Irrigating  Expense $ 

To  charge  the  former  account  with  its 
proportion  of  the  cost  of  irrigating. 

Where  irrigation  is  employed  in  the  production  of  crops,  the 
cost  of  supplying  water  cannot  be  charged  directly  to  the  various 
crops  since  much  of  the  expense  is  general.  An  irrigation  system 
usually  consists  of  a  main  canal,  flume,  or  aqueduct  from  which 
subcanals  are  extended  and  from  these  in  turn  run  laterals 


RANCH  COST  ACCOUNTING  259 

extending  into  the  fields.  The  cost  of  upkeep  of  canals,  flumes, 
aqueducts,  and  subcanals  may  be  chargeable  to  many  crops, 
depending  upon  the  number  they  serve.  The  cost  of  attending 
the  laterals  and  actually  applying  the  water  to  the  respective 
crops  will  usually  be  uniform  in  proportion  to  acreage.  For 
this  reason  all  irrigating  expense  is  usually  charged  to  one  account 
and  distributed  to  the  crops  on  the  basis  of  acreage.  If  condi- 
tions are  such  that  the  cost  of  applying  the  water  cannot  be 
equitably  distributed  on  the  basis  of  acreage,  the  expense  thereof 
should  be  charged  directly  to  the  crops  affected,  leaving  only  the 
cost  of  conveying  water  to  the  laterals  to  be  apportioned. 

Assuming  in  this  case  that  all  cost  of  providing  water  can  be 
equitably  distributed  on  the  basis  of  acreage,  Garden  Expense 
will  be  charged  with  its  pro  rata  part,  but  since  the  cost  of  irri- 
gation for  the  current  year  has  not  yet  been  determined  it  is 
necessary  to  apply  the  cost  per  acre  for  the  preceding  year. 

(24)  House  Expense $ 

Meat  Purchased $ 

Pork  Butchered 

Beef  Butchered 

Poultry  and  Eggs 

Groceries 

Fuel 

Garden 

Cook 

Depreciation  of  Houses 

Depreciation  of  House  Equipment 

Repairs  Houses 

To  close  all  accounts  making  up  the 
cost  of  running  the  houses,  which  rep- 
resents the  cost  of  board. 

(25)  Sundry  "Expense"  Accounts,  etc 

House  Expense 

To  close  the  latter  account,  distributing  it 
on  the  basis  of  man-hours  as  shown 
by  the  labor  record,  excluding  time 
charged  to  accounts  already  closed. 


26o  ACCOUNTING— THEORY  AND  PRACTICE 

It  is  assumed  in  this  case  that  the  organization  is  a  corpora- 
tion and  that  the  house  is  conducted  solely  for  the  purpose  of 
boarding  the  men  employed.  In  this  case  certain  problems  in- 
volved in  the  case  of  individual  ownership  are  avoided.  Where 
the  form  of  organization  is  that  of  individual  ownership  the  house 
is  run  for  two  purposes :  boarding  farm  workers,  which  is  a  farm 
expense  chargeable  to  farm  operations;  and  raising  the  family, 
which  is  a  purely  personal  expense  and  is  not  chargeable  to  farm 
operations.  It  is  customary  in  instances  of  this  kind  to  charge 
House  or  Household  with  the  cost  of  running  the  house  as  has 
been  done  herein,  but  instead  of  charging  out  all  house  expense 
as  cost  of  board,  an  agreed  amount  per  person  engaged  in  farm 
work  is  charged  to  Board  and  credited  to  House.  Operations  are 
charged  and  House  credited  also  with  a  fair  amount  for  the  labor 
of  each  member  of  the  household.  The  balance  of  the  House 
account  then  represents  personal  expense  of  the  family  and  is 
treated  not  as  a  farm  expense  but  as  an  application  of  profits. 

(26)  Depreciation  Accrued  on  Fences $ 

Repairs  to  Fences $ 

To  close  latter  account. 

This  is  on  the  assumption  that  all  such  repairs  are  in  the 
nature  of  replacements,  as  is  usually  the  case. 

{27)  Plowing  and  Harrowing  Expense,  Miscellaneous. .  $ 

Depreciation  Plows  and  Harrows $ 

Repairs  Plows  and  Harrows 

To  close  latter  accounts  representing 
general  expenses  that  cannot  be 
charged  directly  to  the  various  crop 
accounts. 


(28)  Sundry  Produce  "Expense"  Accounts 

Plowing   and    Harrowing    Expense — Mis- 
cellaneous   

To  close  latter  account  distributing  it  on 
the  basis  of  acres  plowed  and  harrowed, 
per  acreage  record. 


RANCH  COST  ACCOUNTING  261 


(29)  Straw  Summary 

Straw  Expense 

To  close  latter  account. 

(30)  Hay  Expense,  General 

Depreciation  Hay  Equipment 

Repairs  Hay  Equipment 

To  close  latter  accounts  representing 
general  expenses  that  cannot  be 
charged  directly  to  the  various  hay 
crops. 

(31)  Sundry  "  Hay  Expense  "  Accounts 

Hay  Expense,  General 

To  close  latter  account,  distributing  it  on 
the  basis  of  tons  harvested. 

(32)  Grain  Expense,  General 

Depreciation  Grain  Equipment 

Repairs  Grain  Equipment 

To   close  latter   accounts   representing 
general     expenses     that     cannot     be 
charged  directly  to  the  various  grain 
•     crops. 

(33)  Sundry  " Grain  Expense"  Accounts 

Grain  Expense,  General 

To  close  latter  account,  distributing  it  on 
the  basis  of  bushels  or  hundred-weight 
threshed. 

(34)  Irrigating  Expense 

Repairs  Flumes  and  Pipelines 

To  close  latter  account. 

(35)  Sundry  Produce  "Expense"  Accounts,  (Excluding 

Garden) 

Irrigating  Expense 

To  close  latter  account,  distributing  it  on 
the  basis  of  acres  irrigated.  Garden  is 
excluded,  since  it  was  charged  with  the 
estimated  cost  of  irrigation  in  entry  23. 


262  ACCOUNTING— THEORY  AND  PRACTICE 


(36)  Sundry  "Expense"  Accounts 

Sundry  Repairs  Accounts 

To  close  accounts  representing  any  re- 
pairs of  improvements  or  equipment 
not  already  charged  off,  charging  them 
to  accounts  receiving  the  benefits 
thereof. 


For  example,  repairs  to  cattle  sheds  should  be  charged  to  Cattle 
Expense,  etc. 

(37)  Straw  "Summary" $ 

Sundry  Grain  "  Expense  "  Accounts $ 

To  close  former  account,  distributing  it  as 
a  by-product  to  the  various  grain  crops. 

Under  normal  conditions  this  may  be  on  the  basis  of  yield  in 
bushels.  If  certain  crops  have  not  borne  normally,  an  acreage 
basis  may  be  more  equitable  since  the  straw  produced  will 
generally  be  uniform  even  though  the  grain  yield  is  low.  For 
this  reason,  distribution  on  the  basis  of  acreage  will  be  found  more 
satisfactory  for  general  use. 

{^8)  Sundry  Produce  "Summary"  Accounts $ 

Sundry  Produce  "Expense"  Accounts.  ...  $ 

To  close  latter  accounts. 


(39)  Sundry  Live  Stock  "Summary"  Accounts 

Sundry  Live  Stock  "Expense"  Accounts. . 
To  close  latter  accounts.      Horse   Ex- 
pense has  already  been  closed   (see 
entry  20),  also  Chicken  Expense  (see 
entry  21). 

(40)  Sundry  Produce  and  Live  Stock  "  Inventory " 

Accounts 

Sundry  "  Summary"  Accounts 

To  set  up  closing  inventories.  Horses 
inventory  has  already  been  entered 
(see  entry  7). 


RANCH  COST  ACCOUNTING  263 

Inventories  are  priced  in  accordance  with  principles 
previously  laid  down. 

(41)  Sundry  "Summary"  Accounts $ 

Profit  and  Loss $ 

To  close  former  accounts,  which  repre- 
sent profit  on  the  different  crops  of 
produce  and  live  stock. 

If  a  loss  has  been  sustained  the  balance  will  be  on  the  debit 
side  of  the  "Summary"  accounts  requiring  another  entry  the 
reverse  of  this  one. 

(42)  Taxes  General $ 

Taxes  Federal 

Taxes  General  Accrued $ 

Taxes  Federal  Accrued 

To  accrue  taxes. 

(43)  Sundry  "Income"  Accounts 

Profit  and  Loss 

To  close  former  accounts  which  cover  all 
income  derived  from  sources  other  than 
live  stock  and  produce. 

(44)  Profit  and  Loss 

Sundry  Expense  Accounts 

To  close  latter  accounts  covering  all  ex- 
penses other  than  those  chargeable  to 
live  stock  and  produce,  which  have 
already  been  closed  into  their  respec- 
tive Summary  accounts. 


Financial  Statements  and  Statistics 

Typical  pro-forma  financial,  analytical  statements  follow. 

Other  schedules  usually  presented  besides  those  here  shown 
are  accounts  receivable  and  accounts  payable  which  are  not 
different  from  similar  schedules  found  in  other  lines  of  business 
except  that  there  are  ordinarily  fewer  items,  since  business  is 
usually  done  on  a  cash  basis,  especially  in  the  case  of  sales. 


264  ACCOUNTING— THEORY  AND  PRACTICE 

Meadow  Grove  Land  and  Live  Stock  CoMPAi«fY 
Balance  Sheet 
March  31,  1921 

Assets 

Current: 

Cash $ 

Accounts  Receivable $ 

Notes  Receivable 


Total 

Deduct   allowances  for  bad  ac- 
counts and  notes 


Produce: 
Vegetables: 
Potatoes . . 
Turnips . . . 
Beans. .  . . 
Pumpkins , 


Grain: 
Wheat . 
Oats .  . 
Barley . 
Corn . . 


Hay: 
Timothy  and  Clover . 

Alfalfa 

Wild 

Straw 


Supplies: 

Groceries 

Coal 

Fence  Posts 

Repair  Parts  for  Machinery . 

Total  Current  Assets 


RANCH  COST  ACCOUNTING  265 


Prepaid  Expenses: 

Insurance 

Interest 

Rent 

Advances  on  Wages . 


Total  Prepaid  Expenses . 

Live  Stock:' 

Cattle 

Sheep 

Hogs 

Horses 

Chickens 

Ducks 

Turkeys 


Total  Live  Stock , 
Fixed: 

Equipment: 

Garden 

Deduct  Depreciation 
accrued 


Grain 

Deduct  Depreciation 
accrued 


Hay 

Deduct  Depreciation 
accrued 


Horse 

Deduct  Depreciation 
accrued 


Irrigating 

Deduct  Depreciation 
accrued 


'  Live  stock  is  put  under  a  separate  heading  on  the  balance  sheet  because  it  does  not 
represent  either  current  or  fixed  assets,  but  rather  a  combination  of  both.  Those  kept  for 
breeding  work,  or  purposes  other  than  sale  are  of  the  nature  of  fixed  assets;  those  requiring 
2  or  3  years  to  mature  and  prepare  for  market  can  hardly  be  classed  as  current  assets,  while 
those  subject  to  sale  are  undoubtedly  current.    Hence  they  are  given  a  separate  heading. 


266  ACCOUNTING— THEORY  AND  PRACTICE 

Plowing  and  Harrowing ...     $ 

Deduct  Depreciation 

accrued 


House 

Deduct  Depreciation 
accrued 

General 

Deduct  Depreciation 
accrued 


Improvements  Subject  to  Depreciation: 

Fences $ 

Deduct  Depreciation 

accrued $ . 

Houses $ 

Deduct  Depreciation 

accrued 

Barns $ 

Deduct  Depreciation 
accrued 

Sheep  Sheds $ 

Deduct  Depreciation 

accrued 

Cattle  Corrals $ 

Deduct  Depreciation 

accrued 

Dehorning  Chutes $ 

Deduct  Depreciation 

accrued  

Poultry  Houses $ 

Deduct  Depreciation 

accrued 

Hog  Houses $ 

Deduct  Depreciation 

accrued 


RANCH  COST  ACCOUNTING  267 


Telephone  Lines .... 

Deduct  Depreciaton 

accrued 


Flumes  and  Pipelines . 
Deduct  Depreciation 
accrued  


Hay  Racks 

Deduct  Depreciation 
accrued 


Improvements  not  Subject  to  Depreciation: 

Clearing^ $ 

Breaking^ 

Seeding"* 


Land 

Total  Fixed  Assets . 
Total  Assets 


Liabilities 
Current: 

Accounts  Payable 

Notes  Payable 

Accrued: 

Wages $ 

Interest 

Taxes 


Total  Current  Liabilities $ . 


'  Clearing  rough,  timbered,  or  otherwise  untillable  ground  is  not  subject  to  depreciation 
since  the  subsequent  tilling  of  the  soil  tends  to  improve  rather  than  depreciate. 

3  Breaking  virgin  sod  is  not  subject  to  depreciation  for  the  same  reason  mentioned  in 
note  2.  If  for  any  reason  cultivation  is  discontinued  for  a  number  of  years  depreciation  will 
begin  to  accrue  and  should  be  taken  into  account. 

4  Ground  seeded  ir  perennial  crops  is  subject  to  depreciation,  since  it  must  be  invariably 
reseeded  in  time;  however,  ordinarily  the  process  of  reseeding  is  carried  on  gradually;  seed  is 
sowed  on  spots  that  become  thin,  the  process  continuing  from  year  to  year.  In  such  cases 
the  cost  may  be  charged  as  a  current  expense  in  the  same  manner  that  repairs  to  a  building 
would  be  charged  to  expense.  If  the  crop  is  one  that  must  invariably,  in  time,  be  entirely 
plowed  up  and  reseeded,  it  should  be  placed  among  the  depreciable  assets  and  depreciated 
accordingly. 


268  ACCOUNTING— THEORY  AND  PRACTICE 

Fixed : 

Contracts  for  Purchase  of  State  Lands  .     $ 

Bonds  (due  January  i,  19 — ): 

Authorized $ 

Unissued 


Outstanding 

Total  Fixed  Liabilities . 


Total  Liabilities $ . 

Capital 
Capital  Stock: 

Authorized $ 

Unissued $ 

Treasury 


Outstanding . , 

Surplus: 

Beginning  of  year. 
Adjustments 


Actual 

Profits  for  the  year . 


End  of  year , 


Total  Capital $. 


Total  Liabilities  and  Capital $ . 


Meadow  Grove  Land  and  Live  Stock  Company 

Profit  and  Loss 

March  31,  192 1 

Operation 


Gross  Profits: 
Produce: 
Grain: 
Wheat . 
Oats .  . 
Rye . . . 
Barley. 


RANCH  COST  ACCOUNTING  269 


Hay: 

Timothy  and  Clover $. 

Alfalfa 

Wild 


Vegetables: 

Potatoes 

Turnips 

Beans 

Sugar  Beets . 

Live  Stock: 

Cattle 

Sheep 

Hogs 

Ducks 

Turkeys . . . . 

Miscellaneous: 
Pasturage . . . 
Horse  Hire . . 


Total  Gross  Profit  from  Operation $ . 

General  Farm  Expenses: 

Depreciation  on  Telephone  lines $ 

Depreciation  on  General  Equipment 

Telephone 

Taxes — General 

Unallocated  Expense 

Total  General  Farm  Expenses 


Net  Profit  from  Operation .  . ; $ . 

A  dministration 
Expenses: 

Office  Expense $ 

Auditing 

Federal  Taxes 

Interest  Paid $ 

Interest  Received 


Total  Administration  Expense . 


Net  Profit $ . 


270 


Income; 


ACCOUNTING— THEORY  AND  PRACTICE 
Miscellaneous 


Profit  on  Investments . 
Profit  on  Sale  of  Land . 


Total  Miscellaneous  Income. 

Expenses: 

Expenses  on  Investment  Property . .  . 


Net  Miscellaneous  Income $ . 


Net  Income. 


Meadow  Grove  Land  and  Live  Stock  Company 

Analysis  of  Produce  Accounts 

Year  Ended  March  31,  192 1 


Grain 


Wheat: 


Inventory  beginning  of  year , 

Produced 

Purchased 


Total 

Sold 

Consumed 

Unaccounted  for 

Inventory  end  of  year. 


Bushels  of 
Grain  and 
Vegetables, 
Tons  of  Hay    at 


Value 


Total 

Gross  Profit  per  Profit  and  Loss  Statement . 


(All  grain,  hay,  and  vegetable  accounts  are  analyzed  in  the  same  manner.) 

Note:    The  quantity  column  should  always  balance,  but  the  value 

column  will  show  a  difference  represented  by  the  profit  or  loss  on  the  crop. 


RANCH  COST  ACCOUNTING 


271 


Meadow  Grove  Land  and  Live  Stock  Company 
Analysis  of  Live  Stock  Accounts 
Year  Ended  March  31,  192 1 


Cattle 
Inventory  beginning  of  year . 

Purchased 

Expenses 

Increase  (number  born) 


Average 
Number  of        per 
Head  Head 


Value 


Total. 


Sold 

Butchered 

Died 

Inventory  end  of  year . 


$. 


Total 

Gross  profit  per  Profit  and  Loss  Statement . 


Sheep 

(Sheep  and  all  other  live  stock  accounts  will  be  analyzed  in  the 
same  manner.) 

Meadow  Grove  Land  and  Live  Stock  Company 
Comparative  Statistics 

Year  Ended  March  31 
Wheat:  1921     1920     1919     1918 

Acres 

Yield  in  bushels 

Yield  per  acre  in  bushels 

Average  yield  in  state  per  government  sta- 
tistics   

Cost  of  production  (expenses) $....  $....  $....  $.... 

Cost  of  production  per  bushel , 

Average  selling  price  per  bushel 

Average  selling  price  of  yield  of  one  acre 

Cost  of  yield  of  one  acre 

Gross  profit  on  one  acre 


272 


ACCOUNTING— THEORY  AND  PRACTICE 


Oats: 

(The  same  statistics  will  be  used  for  all 
grains  and  vegetables  and  also  for  hays, 
using  tons  instead  of  bushels  in  the  case  of 
hays  and  sometimes  in  the  case  of  vege- 
tables where  raised  in  large  quantities.) 

Pasturage: 

Income 

Expenses 

Net  income 

Average  number  of  head  pastured 

Net  income  per  head  pastured 

Horses: 

Work  horses  owned  end  of  year 

Work  horses  owned  (average  during  year) 

Horse-days  worked 

Potential  horse-days 

Horse-days  idle 

Average  days  each  horse  worked 

Percentage  utilized 

Horse  expense 

Cost  per  horse , 

Cost  per  horse  per  day , 

Cost  per  horse-day  worked 


Year  Ended  March  31 
1921     1920     1919     1918 


Boarding  Men: 

Number  of  man-days  worked 

Cost  of  boarding  men  (total  house  expense)  $. . 
Cost  of  board  per  man-day  worked 

Irrigating: 

Acres  irrigated 

Cost  of  irrigation $ . . 

Cost  per  acre 

Acreage : 

(List    different    crops,    pastures,    unused 
ground,  etc.,  and  acreage  devoted  to  each.) 


RANCH  COST  ACCOUNTING 


273 


Meadow  Grove  Land  and  Live  Stock  Company 

Comparative  Analysis  of  Cost  of  Production 

Grain 


192 1 


Year  Ended  March  31 
1920 


1919 


Wheat: 

Seed 

Labor 

Board  of  men . . . . 

Manager 

Horses 

Irrigating 

Sacks 

Interest  on  invest- 
ment  

General 


Per 

Bu. 
(Yield 
.  .  .Bu.)    Amount 


Per 

Bu. 
(Yield 
...  Bu.)    Amount 


Per 

Bu. 
(Yield 
.  . .  Bu.)    Amount 


Total  per  analy- 
sis of  produce 
accounts $ $ . 


$. 


$. 


A  like  analysis  will  be  made  for  each  grain  and  hay  account. 

Note:  A  similar  analysis  may  be  made  of  various  expense  accounts 
including  live  stock  and  house  expense.  In  the  case  of  live  stock  no 
satisfactory  unit  rate  can  be  established  since  an  average  cost  per  head 
including  all  ages  would  be  of  little  value.  House  expenses  may  be  re- 
solved to  a  unit  rate  per  man-day. 

VOL.  Ill — 18 


274  ACCOUNTING— THEORY  AND  PRACTICE 


Meadow  Grove  Land  and  Live  Stock  Company 
Analysis  of  Horse-Days  Worked 
Statement  Showing  to  What  Extent  Work  Horses  Were  Used 

The  figures  at  the  top  of  the  columns  indicate  the  number  of  horses 
used,  while  the  figures  in  the  columns  indicate  the  number  of  days  the 
respective  numbers  of  horses  were  used. 

Number  of  Total       Total      Total      Cost  of 

Horses  Used:      01234567891011      Horse-      Poten-     Horse-     Keeping 
Total  Days         tial         Days       Horses 

Month   Days  in  Worked     Horse-       Idle  Not 

Month  Days  Worked 

1920 

Apr.  30     $ 

May  31      

June  30 

July  31      

Aug.  31      

Sept.  30     

Oct.  31      

Nov.  30     

Dec.  31      

1921 

Jan.  31  

Feb.  28 

Mar.  31  

Total  365      $ 


Note :  The  above  outline  is  for  a  case  where  1 1  work  horses  are  owned; 
if  more  or  less  are  owned,  the  columns  should  be  increased  or  lessened  to 
correspond.  The  aggregate  of  the  amounts  extended  into  the  several 
columns  must  always  agree  with  the  total  days  in  the  month. 


CHAPTER   VIII 

ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY 

By  Nina  M.  Miller 

L  Manufacturing  Processes  and  De[>artmentization 

Development  of  the  Iron  Industry 

Iron,  the  strongest  and  most  useful  of  all  heavy  metals,  is 
found  in  great  abundance  in  many  parts  of  the  earth.  Its  field 
of  utility  widens  with  the  progress  of  invention  and  our  growing 
industrial  needs,  so  that,  at  the  present  time,  such  a  variety  of 
qualities  of  iron  are  manufactured  that  it  can  rightfully  be  con- 
sidered the  foundation  of  modern  economic  development. 

Before  iron  was  melted  to  a  liquid  state  by  the  modern  method 
of  the  cupola  and  air  blast,  fire  was  applied  directly  to  the  iron 
ore  until  it  became  heated  to  a  sticky  consistency,  after  which 
the  molten  metal  was  extracted  from  the  fire  in  large  balls  or 
masses  and  pounded  to  remove  the  slag  or  impurities.  This 
molten  mass  was  then  ready  to  be  rolled  or  shaped  as  desired. 
This  is  what  is  called ' '  wrought ' '  iron .  It  is  pliable  and  is  usually 
made  into  round  or  bar  iron,  iron  sheets,  iron  pipe,  etc. 

The  invention  of  the  cupola,  a  high  iron  stack  in  which  layers 
of  iron,  charcoal,  coke,  or  coal  are  burned  together,  enabled  the 
modern  founder  to  draw  off  the  molten  Uquid  from  a  spout  at  the 
bottom  of  the  cupola  after  the  floating  waste,  or  "slag,"  as  it  is 
called,  has  been  run  off  from  another  spout  higher  up.  The 
molten  liquid  is  poured  into  molds  formed  of  sand,  and  of  the 
desired  shapes.  The  cooled  iron  is  known  as  ''cast"  or  "grey" 
iron.  The  castings  are  ready  for  use  in  their  rough  state  as  soon 
as  they  are  cold  and  the  sand  has  been  cleaned  from  the  surfaces. 
Grey  iron  is  used  to  make  heavy  castings  where  strength  and  rigid- 

275 


276  ACCOUNTING— THEORY  AND  PRACTICE 

ity  are  needed,  as,  for  instance,  car  wheels,  heavy  machine  parts, 
etc.,  or  for  lighter  castings  where  rigidity  is  the  principal  require- 
ment. Where  lightness  and  phability  are  the  desired  qualities, 
malleable  iron  will  best  serve  the  purpose. 

Malleable  iron  is  cast  iron  which  has  been  made  pliable  by 
being  slowly  reheated  in  an  annealing  oven,  the  temperature  of 
which  is  gradually  increased  to  a  point  below  fusion,  and  is  then  as 
gradually  decreased.  The  degree  of  malleability  is  regulated  by 
the  rapidity  of  the  cooling  process.  Although  malleable  iron 
may  be  made  from  cupola  cast  iron  of  correct  chemical  analysis 
it  is  far  cheaper  and  more  certain  of  results  to  melt  it  in  open 
hearth  or  air  blast  furnaces,  as  is  the  most  used  method  today. 
Between  i860  and  1870  the  invention  and  perfection  of  what  is 
known  as  the  "Bessemer"  process  made  it  possible  to  raise  the 
temperature  of  the  molten  metal  above  the  melting  point  of  steel, 
thus  freeing  it  from  its  many  impurities  by  fusion  rather  than  by 
skimming  them  off  in  the  shape  of  slag,  as  is  necessary  by  the 
cupola  process. 

Malleable  iron  differs  from  wrought  iron  in  that  it  is  free 
from  slag,  and  differs  from  cast  iron  in  that  it  is  springy  and  bends 
under  a  strain  without  breaking.  Therefore  it  is  especially 
useful  for  light  machine  parts,  agricultural  implement  castings, 
automobile  castings,  small  car  castings,  and  light  hardware,  where 
light  weight  and  toughness  are  required  and  malleabihty  is 
essential  in  order  to  withstand  the  sudden  shocks  incident  to  hard 
usage.  Since  malleable  metal  can  be  cast  in  intricate  shapes,  it 
often  replaces  castings  formerly  made  of  steel.  The  hardness  or 
softness  can  be  regulated  by  the  suddenness  with  which  the  cast- 
ings are  cooled  after  being  reheated  in  the  annealing  ovens.  Cer- 
tain standard  shapes  of  malleable  iron  castings,  such  as  wrenches, 
plumbing  suppHes,  clevises,  tank  lugs,  etc.,  listed  in  every  hard- 
ware catalogue,  are  often  made  up  between  seasons  in  order  to 
keep  the  foundrymen  busy  when  regular  contract  orders  fail. 

Contracts  for  malleable  iron  castings  are  usually  entered  into 
for  a  season's  requirements  of  a  certain  number  of  tons  between 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        277 

minimum  and  maximum  limits,  as,  for  instance,  "not  less  than 
200  tons,  not  more  than  250  tons"  at  a  definite  price  per  ton. 
This  is  to  protect  both  purchaser  and  seller  against  market 
changes.  The  kind  and  character  of  the  patterns  to  be  furnished 
by  the  customer  are  carefully  specified,  and  it  is  understood,  un- 
less otherwise  stated,  that  not  less  than  a  hundred  molds  of  each 
pattern  will  be  ordered  at  one  time.  This  is  very  important, 
since  heavier  or  lighter  castings,  castings  with  cores  or  without, 
would  have  an  important  bearing  on  the  cost  of  manufacturing 
and  on  the  profit  or  loss  sustained  on  the  contract.  Time  of 
deKvery  is  also  an  important  item.  For  this  reason  it  is  very 
desirable  to  book  orders  for  industries  which  have  different 
manufacturing  seasons,  or  for  appHances  which  are  manufactured 
during  twelve  months  of  the  year.  Under  such  conditions 
skilled  workmen  can  be  kept  permanently  employed  on  profitable 
work.  July  i,  when  midsummer  heat  saps  the  energy  of  work- 
men, is  the  end  of  the  fiscal  and  usually  the  contract  year. 

Departments  of  Manufacture 

For  the  purpose  of  affording  the  student  a  better  insight 
into  the  accounting  system  of  a  foundry,  it  is  advisable  to  give 
a  brief  survey  of  the  various  departments  and  operations  of  manu- 
facture. The  principal  manufacturing  departments  with  their 
auxiliaries  are: 

Stores  Department  for  raw  materials  and  supplies 
Melting  Department 

Blacksmith  Shop 

Sprue  Mills 
Molding  Department 

Core  Room 

Pattern  Shop 

Carpenter  Shop 
Hard  Iron  Department 

Cleaning 

Trimming 


278 


ACCOUNTING— THEORY  AND  PRACTICE 


Annealing  Department 

Soft  Iron  Cleaning 
Fitting  and  Assembling  Department 
Shipping  Department 

In  smaller  foundries  the  hard  iron  cleaning  and  trimming 
may  be  combined  in  one  department.  Depending  on  the  char- 
acter of  the  castings  made,  the  fitting  and  assembling  and 
shipping  departments  can  often  be  combined  into  one  depart- 
ment. 

The  following  charts  (Forms  la  and  b)  show  the  raw  material 
used  in  the  process  of  manufacture,  the  relation  of  one  depart- 
mental process  to  another,  and  the  functional  organization  of  the 
business. 


^ 


Pig  Iron 


Steel  Scrap 


i— I      Hard  Iron 
Scrap 


Mall.  Iron 
Scrap 


Fire  Brick 
Clay,  Sand 


Fuel  —' 


— I  Scrap  I   < 


\  Scrap  }— <-        Cleaning  ^^  Stafs| 


Fitting 
Assembling 


Shipping 


Repairs 
Maintenance 


Form  I.    (a)  Chart  Showing  Processes  of  Malleable  Iron  Manufacture 

In  the  sections  immediately  to  follow,  such  departmental 
matters  will  be  discussed  as  bear  upon  the  accounting  problems 
involved  in  compiling  the  costs  of  manufacture  and  the  financial 

statements. 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        279 


•S  J  4;  .S  .S  .S  I  «  ^         ^      ^ 
v2i  ^  5.^  J3  ^2  ^  o  ^  "3      "^ 


(u  bj       .a 

W   h.  O.   ">    03 


I         M  00.. 


O   CO 


C 


S  <  U  ►S  ptH  CO  O  fo  O  m  m  CIh  O 


PiJ  Oi 


a 

+2 

rS 

•^  ^ 

>1 

a  1 

s 

^ 
X 

w 

28o  ACCOUNTING— THEORY  AND  PRACTICE 

Raw  Materials  and  Supplies  Stores 

The  bulky  raw  materials  used  in  a  foundry  consist  of  pig  iron, 
steel  scrap,  and  malleable  scrap,  coal  or  coke,  sand,  fire  brick, 
and  fire  clay;  supplies  comprise  annealing  pots,  flasks,  bottom 
boards,  matches,  etc.  The  use  of  so  many  bulky  materials  makes 
necessary  a  large  yard  space.  For  the  operation  of  a  large 
foundry  it  is  also  necessary  to  have  at  least  one  railway  spur  or 
track  and  preferably  two,  one  each  for  incoming  and  outgoing 
freight.  The  pig  iron  is  unloaded  in  piles  along  the  side  of  the 
track  as  near  the  melting  furnace  as  possible.  Each  pile  is 
marked  with  the  car  number  and  initials  in  such  a  way  that  wind 
and  weather  conditions  will  not  obliterate  the  numbers.  A 
memorandum  is  kept  of  car  numbers,  their  location  in  the  yard, 
and  the  chemical  analysis  of  each  car-lot  as  it  is  received,  either 
from  the  smelter  or  the  company  laboratory. 

Everything  entering  into  the  manufacture  of  iron  requires 
chemical  analysis.  Iron  ore,  for  instance,  is  never  found  in  a 
pure  state.  It  absorbs  foreign  elements  or  impurities  from 
everything  it  comes  in  contact  with  during  the  process  of  con- 
version into  usable  iron.  These  foreign  elements  have  an 
important  efifect  on  the  fluidity  of  the  melted  iron  and  also  on  the 
quality  of  the  finished  product.  The  coal,  especially  melting  and 
annealing  coal,  must  have  maximum  heat  units  and  low  sulphur 
content,  and  only  a  certain  few  soft  coals  meet  these  requirements. 
The  molding  sand  must  contain  the  right  proportions  of  clay  and 
loam,  and  the  core  sand  must  be  of  proper  consistency  and  proper 
mixture  to  make  cores  tough  enough  not  to  break  when  the  iron 
is  poured  into  the  molds,  but  brittle  enough  to  crumble  after  the 
castings  have  cooled. 

To  facilitate  the  handling  of  raw  material,  the  entire  yard 
space  is  laid  out  in  imaginary  squares  numbered  like  the  rulings 
on  a  map.  Much  time  is  saved  in  locating  material  recorded  in 
a  stores  ledger  if  this  system  is  followed  and  it  also  lessens  the 
temptation  to  substitute  more  accessible  material.  When  coal  is 
delivered  in  cargoes  at  lake  ports  or  in  carload  lots,  it  may  be 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        28 1 


a 

b 

c 

d 

e 

f 

1 

2 

3 

4 

stored  in  bins  of  known  capacity  for  ease  in  estimating  periodical 
inventories,  or  a  local  coal  dealer  may  store  the  season's  supply, 
and  deliver  as  required  di- 
rectly to  the  furnace  or  oven 
in  need  of  it.  Coke,  the 
molding  and  core  sands,  and 
fire  clay  are  usually  stored  in 
bins  under  cover,  while  the 
larger  supplies,  like  fire  brick, 
flasks,  annealing  pots  and  bottoms,  molding  and  core  boards, 
may  be  piled  in  tiers  of  standard  heights  and  numbers,  so  that 
they  may  be  readily  coimted  and  checked.  Small  supplies 
and  tools  are  kept  in  a  regular  stores  department  in  charge  of  a 
clerk  who  keeps  accurate  records  on  bin  tags  of  each  item  received 
or  issued.  His  carbon  copy  of  goods  ordered  is  returned  to  the 
office  after  he  has  checked  the  quantities  and  has  entered  them  on 
his  bin  tags.  Issues  are  handled  in  the  usual  way.  The  issues 
of  raw  materials  in  the  yard  are  authorized  by  the  superintendent 
and  the  records  are  sent  to  the  office  for  cost  accounting  purposes. 

Melting  Department 

Since  the  invention  of  the  Bessemer  process,  most  malleable 
iron  is  melted  in  rectaiigular-shaped  furnaces  built  of  brick  and 
stone  reinforced  by  heavy  steel  bars  or  rails,  with  a  fire  box  near 
one  end.  It  is  not  possible  to  buy  pig  iron  of  imiform  chemical 
analysis,  therefore  it  is  necessary  to  select  from  the  stock  on  hand 
iron  of  stronger  or  weaker  analysis  with  more  or  less  steel  and 
malleable  -^crap  in  order  to  secure  the  desired  quality  of  finished 
iron.  The  melter  receives  from  the  superintendent  or  his  repre- 
sentative, a  memorandum  of  the  weights  of  pig  iron  of  specified 
car  numbers,  and  the  weight  of  scrap  which  will  be  delivered  to 
him  for  each  melt.  This  melt,  consisting  of  about  8  or  10  tons  of 
metal,  is  spread  out  over  the  bottom  of  the  furnace,  heavy  iron 
arches  are  swung  into  place,  and  the  spaces  between  are  cemented 
together.    The  quick,  intense  heat  generated  in  the  fire  box  is 


282  ACCOUNTING— THEORY  AND  PRACTICE 

forced  over  the  top  of  this  bed  of  iron  by  a  strong  air  blast  gener- 
ated with  powerful  fans.  Melting  may  be  considered  the  most 
important  part  of  the  casting  of  malleables,  for  if  the  mixture  is 
not  correctly  melted  in  the  first  place,  perfection  in  other  depart- 
ments will  not  overcome  this  original  defect.  Properly  melted 
iron  will  have  no  cinders  or  hard  spots  embedded  in  it,  it  will  pour 
easily  and  will  completely  fill  well-proportioned  molds.  Years 
of  experience  are  required  to  become  a  good  melter. 

The  excess  heat  generated  for  a  melt,  over  and  above  what  is 
required  for  actually  melting  the  iron,  formerly  was  wasted  by 
allowing  it  to  pass  out  into  the  air  through  the  chimney.  Now, 
by  the  invention  of  a  certain  type  of  upright  tubular  boiler,  this 
heat  may  be  converted  into  steam  for  power  and  lighting  purposes. 
Where  this  is  the  case  the  expense  of  power,  heat,  and  light  may  be 
an  almost  negligible  factor  of  expense. 

Molding  and  Pattern  Departments 

Molding  is  the  process  of  making  in  sand  an  impression  of  the 
finished  castings  by  means  of  a  pattern  of  the  desired  shape.  Into 
the  technicalities  of  molding  and  pattern -making  it  is  unnecessary 
to  enter,  as  any  encyclopedia  will  furnish  the  information.  The 
discussion  here  is  limited  to  a  brief  description  of  the  terms  which 
find  their  way  into  the  accounts,  or  the  understanding  of  which  is 
necessary  in  computing  malleable  iron  costs. 

Molding  is  done  in  boxes  or  flasks,  either  of  iron  or  wood, 
reinforced  with  heavy  corners  and  clasps.  Flasks  are  made  in 
two  halves,  so  constructed  that  they  can  be  exactly  fitted  together. 
A  flask  is  fitted  to  a  bottom  board  with  cleats  attached  to  raise  it 
from  the  floor.  The  lower  half  or  "drag,"  as  it  is  called,  is  filled 
with  sand  and  half  of  the  pattern  is  placed  in  it.  Where  many 
castings  of  a  kind  are  to  be  made,  a  hard  "match"  of  sand  and 
rosin  is  made  to  act  as  a  permanent  first  filler,  by  this  means 
saving  considerable  time,  as  the  pattern  is  always  in  the  same 
position  within  the  two  halves  of  the  flask.  The  upper  half  of 
the  flask,  called  the  "cope,"  is  first  placed  in  position  on  the 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        283 

lower  half  and  the  sand  is  rammed  tightly  about  the  upper  half 
of  the  pattern,  after  which  the  flask  is  reversed,  the  hard  match  is 
removed,  and  the  sand  is  rammed  about  the  lower  half  of  the 
pattern.  After  this  process  the  pair  of  flasks  is  again  reversed 
to  their  original  position  and  carefully  tapped  on  all  sides  to 
loosen  the  pattern  from  the  sand  and  pack  it  tightly  around  the 
outside  surface.  This  treatment  insures  an  even,  smooth  surface 
on  the  finished  work  and  also  facilitates  withdrawal  of  the  pattern 
from  the  sand. 

A  "gate  "  or  hole  is  next  made  at  one  side  of  the  top  for  pour- 
ing in  the  molten  metal,  and  the  upper  part  of  the  mold  is  pricked 
with  wire  in  several  places  to  allow  the  escape  of  air  and  steam. 
The  flask  is  then  parted  along  the  line  of  juncture,  the  pattern  is 
carefully  removed,  all  imperfections  are  smoothed  out  with  hand 
tools,  all  parts  are  dusted  with  fine  sand.  If  hollow  shapes  are 
required,  suitable  cores  are  fixed  in  prepared  positions,  the  flask 
halves  are  put  together  again,  and  the  mold  is  ready  for  the  pour- 
ing of  the  hot  metal. 

After  the  molten  metal  has  been  poured  and  cooled,  good 
castings  are  removed  to  the  cleaning  department,  while  the 
defective  or  broken  castings  together  with  the  gates  runners,  etc., 
broken  from  the  molds  are  sent  to  the  sprue  mills  to  be  cleaned  of 
sand  and  are  then  returned  to  the  furnace  or  stock  for  remelting. 
Here  the  molding  cost  ends  and  that  of  hard  iron  cleaning  begins. 

The  molder  is  paid  for  all  perfect  castings,  even  though  they 
are  broken  in  handling,  but  he  is  not  paid  for  misnm  castings 
caused  by  careless  pouring.  If  the  mixture,  by  reason  of 
improper  analysis  or  poor  melting  practice,  cannot  be  poured 
properly  into  the  prepared  molds,  he  is  paid  for  his  work  of  mold- 
ing and  the  foundry  suffers  the  loss  due  to  so-called  ''misrun" 
castings.  The  difference  between  the  weight  of  metal  put  into 
the  melting  furnace,  and  the  weight  of  good  castings  plus  waste 
material  returned  to  furnace,  is  the  melting  loss. 

The  pattern  and  core  departments  as  well  as  the  carpenter 
shop  are  principally  auxiliaries  of  the  molding  department,  just 


284       ACCOUNTING— THEORY  AND  PRACTICE 

as  the  blacksmith  shop  prepares  poker  bars,  etc.,  for  the  melting 
department  in  addition  to  doing  the  blacksmith  repairs  work  for 
the  entire  foundry.  The  core  department  furnishes  the  forms  by 
means  of  which  castings  may  be  made  hollow.  The  labor  ex- 
penses of  these  various  departments  are  distributed  on  time  slips 
prepared  under  the  supervision  of  a  foundry  clerk  whose  entire 
time  is  spent  in  the  foundry  keeping  records  of  the  time  of  all 
the  employees,  as  well  as  performing  other  miscellaneous  clerical 
work  for  the  foreman  or  superintendent.  Since  the  pattern 
department  makes  patterns  chargeable  to  customers,  as  well  as 
for  foundry  use,  the  cost  of  its  operation  is  counter -balanced  by 
the  sales  of  patterns  to  customers,  and  the  department  is  there- 
fore nearly  if  not  entirely  self-supporting. 

Malleables  are  usually  made  from  patterns  furnished  by 
customers,  or  if  a  master  pattern  is  furnished,  the  foundry  may 
make  up  "gates"  of  patterns,  charging  them  to  the  customer, 
because  they  remain  his  property  and  are  useful  only  for  his  own 
make  of  machine.  There  may  be  an  agreement  by  which  the 
cost  of  patterns  is  remitted  after  a  certain  tonnage  of  each  pattern 
has  been  made;  or  again,  the  foundry  may  make  additional  gates 
from  customers'  patterns  for  its  own  convenience  in  turning  out 
orders  promptly.  Usually  the  patterns  are  the  property  of  the 
customer,  and  he  has  the  privilege  of  calling  for  their  return 
whenever  an  order  is  completed. 

Cleaning,  Annealing,  and  Assembling 

The  hard  iron  castings  are  delivered  from  the  molding  floors 
to  the  cleaning  room,  where  the  sand  is  removed  in  revolving 
l)arrels  called  "  rattling  mills  "  or  by  the  sand  blast  process.  The 
reinaining  gate  ends  are  then  chipped  off,  they  are  counted  and 
inspected  for  imperfections,  and  the  molder's  personal  record  of 
castings  poured  is  corrected  to  correspond  with  good  castings  sent 
to  the  annealing  department.  The  difference  between  the  castings 
made  and  reported  by  the  molder  and  the  weight  of  good  castings 
transferred  to  the  annealing  department,  is  the  molding  loss.   Care- 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        285 

ful  record  is  kept  of  losses  by  individual  molders  and  by  patterns 
in  order  to  locate  trouble  and  check  undue  expenses  of  operation. 

To  protect  them  from  harmful  gases,  the  hard  iron  castings, 
after  deHvery  to  the  annealing  department,  are  packed  in  iron 
annealing  pots  which  are  open  top  and  bottom  but  are  set  on 
separate  "bottoms"  when  in  use  and  are  placed  in  tiers  in  the 
ovens.  Here  they  are  subjected  to  a  white  heat  for  a  period  of 
from  two  to  three  days,  after  which  they  are  gradually  cooled 
ofif .  This  changes  the  brittle  white  iron  into  a  soft,  grayish,  pHable 
malleable  which  will  bend  under  the  hammer  almost  double 
without  breaking,  and  is  thus  adapted  to  the  sudden  hard  shocks 
incident  to  service  as  parts  of  machinery.  The  scientific  heat 
treatment  determines  the  eventual  value  and  the  tensile  strength 
of  the  malleable  iron  as  well  as  its  softness  and  toughness. 

When  castings  are  unpacked  from  the  annealing  ovens,  they 
are  covered  with  scale,  cinders,  and  oxide  from  the  burning  heat. 
After  these  have  been  removed  from  the  surface  in  rattling  mills 
or  by  sand  blast  process  they  are  inspected,  sorted,  and  coimted. 
If  the  contract  calls  for  any  finishing  work  it  may  be  necessary 
to  grind  off  fins,  straighten  castings  under  a  hammer  or  die,  and 
punch  or  ream  them.  Otherwise  they  are  ready  for  the  packing 
and  shipping  processes.  Rigid  inspection  in  the  shipping  depart- 
ment saves  much  more  than  the  cost  of  the  labor  involved.  The 
buyer  may  return  an  entire  lot  of  castings  and  refuse  to  send 
more  orders,  if  he  should  find  a  quantity  of  hard  castings  or 
badly  warped  castings  in  a  large  lot. 

II.  Accounting  and  Cost-Finding 

Standardized  Costs 

A  knowledge  of  malleable  iron  costs  is  essential  to  intelligent 
marketing  in  competition  with  other  foundries  in  the  same  terri- 
tory. Cutting  of  prices  is  safe  only  for  the  manufacturer  who 
knows  what  volume  of  output  combined  with  the  most  efficient 
production  methods,  will  enable  him  to  lower  the  normal  price  of 


286  ACCOUNTING— THEORY  AND  PRACTICE 

castings  on  some  particular  pattern.  For  purposes  of  control  it  is 
necessary  to  compute  the  cost  per  ton  of  castings  made  during  the 
fiscal  period.  But  where  light  and  heavy  castings  are  poured  side 
by  side  the  average  cost  per  ton  for  a  monthly  period  is  no  indi- 
cation of  the  actual  cost  of  the  two  kinds  of  castings.  Heavy 
castings  without  cores  can  be  produced  by  molding  machines 
and  unskilled  labor  with  small  losses  and  little  supervision,  while 
the  lighter  castings  made  by  hand  may  be  subjected  to  heavy 
losses  in  melting  and  molding,  costing  more  to  clean  and  anneal 
and  needing  much  more  supervision  in  all  departments. 

An  average  cost  per  ton  equalizes  all  these  differences.  To 
estimate  prices  accurately,  separate  job  costs  must  be  obtainable. 
For  this  reason  the  National  Malleable  Castings  Association, 
following  the  tendency  of  all  industries  and  trades  to  associate 
for  mutual  protection,  has  attempted  to  estabhsh  a  standard 
system  of  accounting  for  malleable  foundries.  This  system, 
while  simple  enough  for  the  needs  of  smaller  foundries,  is  capable 
of  being  expanded  for  use  in  larger  foundries  without  changing 
the  principles  involved:  Research  departments  have  been 
established  to  compile  information  from  all  sources  and  to  present 
the  results  in  suitable  form.  A  member  of  the  association  can 
thus  compare  his  percentages  of  costs  by  departments  or  processes 
with  the  standard  averages  and  with  the  high  and  low  averages 
of  various  foundries  making  the  same  class  of  work.  Unusual 
differences  call  attention  to  weaknesses  which  might  otherwise 
be  overlooked.  Such  associations  aim  to  improve  and  standard- 
ize manufacturing  processes  and  conditions,  to  equalize  prices 
with  costs  of  production,  and  to  prevent  large  users  of  malleables 
from  making  raids  on  the  legitimate  trade  by  placing  large  ton- 
nage orders  for  intricate  or  difficult  work  with  smaller  founders 
who  are  ignorant  of  the  cost  of  producing  such  work. 

Standard  Accounting  Classifications 

According  to  the  recommendations  of  the  cost  accountant  of 
the  National  Malleable  Castings  Association,  Robert  F.  Belt, 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        287 

the  important  considerations  in  establishing  an  account  classi- 
fication are 

1.  Arrangement  of  cost  accounts  by  departments. 

2.  Proper  division  and  handling  of  direct  and  indirect  costs. 

3.  Separate  overhead  rate  for  each  department  and  correct 

method  of  arriving  at  the  distribution. 

The  departmental  cost  accounts  and  the  charges  thereto  are 
as  follows ; 

Stores.  Charged  with  all  costs  of  material  at  invoice  prices 
plus  freight  and  unloading  charges. 

Melting.  Charged  with  all  costs  of  delivering  materials 
from  the  yard  or  stores  to  the  furnaces,  and  the  process 
of  melting  up  to  the  time  the  furnace  is  tapped  and  the 
melted  iron  is  delivered  to  molders'  ladles. 

Molding.  Charged,  in  addition  to  the  actual  direct  mold- 
ing charges,  with  all  costs  from  the  time  the  molten  metal 
is  delivered  to  the  ladles,  to  the  time  the  hard  iron  cast- 
ings are  delivered  to  the  cleaning  department.  This  in- 
cludes expenses  of  patterns  and  cores  made  for  f oimdry  use. 

Hard  Iron.  Cleaning  includes  all  costs  of  cleaning  sand 
from  castings  as  delivered  from  the  foundry.  Trimming 
includes  all  costs  of  chipping  off  gates  and  fins,  sorting, 
counting,  and  weighing  hard  iron  castings,  as  well  as  costs 
of  delivering  them  to  the  annealing  department. 

Annealing.  Charged  with  all  costs  of  packing  castings, 
loading  them  in  annealing  ovens,  unloading  after  the 
heats,  and  delivering  them  to  the  soft  iron  department. 

Soft  Iron,  Charged  with  all  costs  of  cleaning  castings  of 
scale  and  delivering  them  to  the  fitting  and  assembling 
department. 

Fitting  and  Assembling.  Charged  with  all  costs  connected 
with  inspecting,  sorting,  fitting,  and  deUvering  castings 
to  the  shipping  department. 

Shipping  Charged  with  all  costs  of  packing,  marking, 
and  shipping  castings. 


288 


ACCOUNTING— THEORY  AND  PRACTICE 


Sources  of  Charges 

The  direct  labor  charges  to  the  above  accounts  are  made 
from  the  pay-roll  distribution  sheets,  and  the  indirect  labor 
both  from  the  pay-roll  distribution  sheets  and  from  the  reports 
made  on  individual  labor  slips.  The  labor  charges  to  the 
blacksmith,  pattern,  carpenter,  and  repairs,  and  maintenance 
accounts  are  made  from  the  individual  labor  slips  illustrated  in 
Form  2. 


Name  of  Workman 

SHOP  COST  SLIPS 
Daily  Record  of  Work  Performed 

Order  No. 

Date 

Nature  of  Work 

Number 
Made 

Materials  Used 

Labor 

Department 
Charge 

Kind 

Quantity 

Cost 

Hours 

Cost 

■ 

_— ^^__ 

. . 

^ 

1 1 

Correct 

Foremio 

Form  2.     Individual  Labor  Slip 

To  be  used  for  blacksmith,  pattern,  and  carpenter  shops  and  for  miscellaneous  labor 

The  charges  for  material,  supplies,  and  small  tools  furnished 
to  various  departments  of  the  foundry,  are  taken  from  properly 
authorized  and  receipted  requisitions  sent  in  through  the  stores 
department  or  yard  department. 

The  fixed  plant  charges  for  power,  heat,  and  light  are  distrib- 
uted in  proportion  to  the  benefits  received.  In  foundries  where 
the  excess  furnace  heat  generates  all  the  power  required  for 
operating,  heating,  and  lighting  the  plant,  this  charge  may  be 
merely  nominal  for  upkeep  and  depreciation.  Where  this  is  not 
the  case,  power  may  be  distributed  on  the  basis  of  horse-power 
consumed,  heat  may  be  figured  on  the  basis  of  floor  space 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        289 

occupied,  and  light  on  the  hours  of  consumption  or  on  the  hours 
and  watts  of  light  used  in  each  department. 

Depreciation,  taxes,  and  insurance  of  buildings  may  be 
allocated  on  the  basis  of  departmental  space  occupied,  while  for 
machinery  and  equipment  the  value  of  these  assets  in  the  several 
departments  is  the  basis  used. 

Income  tax  is  not  permitted  by  the  government  to  be  charged 
to  the  cost  of  operation. 

Other  fixed  charges  which  cannot  be  definitely  allocated  may 
be  distributed  on  the  basis  of  the  average  departmental  pay-roll, 
or  on  the  direct  molding  labor,  if  that  is  a  fair  method  of  distribu- 
tion for  the  particular  industry,  or  by  any  other  method  which 
.seems  equitable  and  is  sanctioned  by  good  accounting  procedure. 

For  the  purpose  of  further  illustrating  the  classification  of  items 
received  for  the  monthly  cost  summaries  through  the  various 
sources  mentioned  above,  the  detailed  classification  of  labor  and 
material  items  as  recommended  by  Robert  E.  Belt  is  given  below: 

Detailed  Classification  of  Labor  and  Material  for  Cost 
Accounts  of  Large  Malleable  Iron  Foundries 


Pig  Iron 

Metal                         ^ 

Malleable  Scrap 
Steel  Scrap 
Home  Scrap 

Firemen 

Slagmen   (taking  out  slag  and 

cleaning  ashpits) 
Skimming 
General  Overhauling 

Indirect  Labor 

Coal  Men 
Charging 
Making  up  Heats 
Operating  Slag  Mill 

Melting 
Department 

Supervision  (foremen  and  assist- 
ants) 
■  Coal 

Fuel 

Fuel  Oil 
Gas 

Supplies  and  Tools 

Repair  Labor 

Repair  Materials 

Overhead  Plant  Charges 

f  »    . 

Laboratory  Expense                            < 

Labor 

Materials  and  Expense 

,     VOL.  Ill-  '" 

290 


ACCOUNTING— THEORY  AND  PRACTICE 


Molding 
Department 


Direct  Labor 


Indirect  Labor 


Supplies  and  Tools 


Repair  Labor 
Repair  Materials 
Overhead  Plant  Charges 

Special  Pattern  and  Flask  Expense 


Core- Making 
Department 


Hard  Iron  Cleaning 
Department 


Direct  Labor 


Fuel 


Supplies  and  Tools 


Repair  Labor 
Repair  Materials 
Overhead  Plant  Charges 


Indirect  Labor 


Bench  Molding 

Floor  Molding 

Machine  Molding 

Gate-Breakers  (cleaning  up 
gangways  and  floors  and  de- 
livering castings  to  the  hard 
iron  cleaning  department) 

Flask,  Board,  and  Chill  Men 

Sand-Cutters 

Ladle-Liners 

Hauling  Molding  Sand  to 
Molders*  Floors 

Shifting 

Iron-Carriers 

Supervision  (foremen  and  assist 
ants) 

Sand 

Facings 

Chaplets 

Oil 

Molasses 

Compound 

Parting 

Molders'  Tools 


Labor 

Material 

Expense 

Bench  Division 
Machine  Division 
Sand- Mixers 
Oven-Tenders 
Wire-Straighteners 
Inspectors  (also  pasting) 
Core- Carriers 

Supervision  (foremen  and  assist- 
ants) 

Sand 

Core  Oil 

Compound 

Wire 

Rods 

Miscellaneous  Supplies 

Miscellaneous  Tools 


Tumbling 
Sand  Blasting 
Cleaning  up  Department 
Supervision  (foremen  and  assist- 
ants) 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        29 1 


Hard  Iron  Cleaning 
Department  -^ 

{Continued) 


Trimming  and 

Inspecting 

Department 


Annealing 
Department 


Finishing  and 

Shipping 

Department 


Supplies  and  Tools 

Repair  Labor 
Repair  Materials 
Overhead  Plant  Charges 


Soft  Iron  Cleaning 
Department 


Indirect  Labor 


Supplies  and  Tools 
Repair  Labor 
Repair  Materials 
Overhead  Plant  Charges 


Indirect  Labor 


Fuel 

Pots  and  Bottoms 
Supplies  and  Tools 
Repair  Labor 
Repair  Materials 
Overhead  Plant  Charges 


Indirect  Labor 


Supplies  and  Tools 

Repair  Labor 
Repair  Materials 
Overhead  Plant  Charges 

Direct  Finishing  Labor 


Stars 
Sand 

Miscellaneous     Supplies     and 
Tools 


Trimming — Sorting 
Inspection  Counting 
Cleaning  up  Department 
Supervision  (foremen  and  assist- 
ants) 
Clerical  Labor 


Packing 

Shaking  Out  and  Delivering  to 
Soft  Iron  Cleaning  Depart- 
ment 

Emptying  and   Filling     Ovens 

Building  Up  and  Taking 
Down  Doors 

Oven  Firemen 

Coal  and  Ash  Men 

Other  Miscellaneous  Labor 

Supervision  (foremen  and  assist- 
ants) 

Clerical 

Coal 

Fuel  Oil 

Gas 


Tumblmg 

Sand  Blasting 

Cleaning  up  Department 

Supervision  (foremen  and  assist- 
ants) 

Stars 

Sand 

Miscellaneous     Supplies     and 
Tools 


f  Chipping 

J  Grinding 

I  Straightening 

\  Punching  and  Reaming 


292 


ACCOUNTING— THEORY  AND  PRACTICE 


Finishing  and 
Shipping 
Department 
(Continued) 


Indirect 
Labor 


Finishing    and    Shipping 


General  Expense 


Supplies  and  Tools 

Repair  Labor 
Repair  Materials 
Overhead  Plant  Charges 

OfBcers'  Salaries 
Office  Salaries 
Office  Expense 
Selling  Expense 
Miscellaneous  General  Expense 


Sorting 

Loading 

Inspecting 

Packing 

Supervision  (foremen  and  assist* 

ants) 
Clerical 

Finishing  Supplies  and  Tools 
Packing  Materials  and  Supplies 


Returns  and  Allowances 


Pattern  Shop 


Carpenter  Shop 


Blacksmith  Shop 


Overhead  Plant 
Charges — Power, 
Heat,  Light 


Direct  Labor  (charge  account) 

Indirect  Labor 

Materials,  Supplies,  and  Tools 

Repair  Labor 

Repair  Materials 

Overhead  Charges 

Direct  Labor 
Indirect  Labor 

Materials,  Supplies,  and  Tools 
Repair  Labor 
Repair  Materials 
_  Overhead  Charges 

Direct  Labor 

Indirect  Labor 

Fuel 

Materials,  Supplies,  and  Tools 

Repair  Labor 

Repair  Materials 

Overhead  Charges 

Labor 
Fuel 
Supplies 
Repair  Labor 
Repair  Materials 
Heating  System 
Electrical  System 
•    Fire  Insurance 
Property  Taxes 
Depreciation 
Medical  and  Hospital 
Liability  Insurance 
Superintendent,  General  Foreman, 

and  Miscellaneous  Yard  Labor 
^  Miscellaneous  Plant  Expense 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        293 

In  some  smaller  malleable  foundries  it  may  be  possible  to 
combine  into  one  department  the  operation  of  hard  iron  cleaning 
and  trimming.  Depending  on  the  class  of  work  which  is  custo- 
marily handled  by  a  particular  foundry  it  may  be  desirable  to 
separate  the  shipping  from  the  finishing.  This  would  be  true  if 
more  than  the  average  amount  of  finishing  work  is  required  on  the 
rough  castings  as  they  come  through  from  the  anneaHng  depart- 
ment', or  if  the  departments  are  in  different  rooms  or  buildings. 

Methods  of  Cost-Finding — ^Tonnage  Costs 

In  computing  foundry  costs  there  are  three  possible  methods, 
namely  tonnage  costs,  job  order  costs,  and  class  costs.     Under 


SUMMARY— MONTHLY  COST  PER  TON  GOOD  CASTINGS 

PRODUCED 


Total     Per  ioo# 

Metal $18,071.13  $1.64 

Melting  Cost 5,287.00  .48 

Molding  Cost 16,436.80  1.50 

Cores 2,199.50  .20 

Hard  Iron:  Cleaning  and  Trimming  2,148.90  .195 

Annealing • 6,545.60  .595 

Soft  Iron:  Cleaning 1,112.45  -loi 

Fitting  and  Assembling 999-9©  .09 

Shipping 1,619.00  .147 

General  Administrative  Expense ..  .  3,643.40  .$3 

$58,063.68    $5,278 

Tons  of  good  castings  made 550 

Average  cost  per  ton  of  good  castings  made $105.57 

Sales  of  malleable  castings  for  month $70,462.88 

Tons  of  good  castings  sold 460 

Average  selling  price  per  ton i53-i8 

Rough  estimate  of  operating  profit  per  ton  of  castings  sold. .    $  47.61 


Form  J.     Monthly  Cost  Summary 


294  ACCOUNTING— THEORY  AND  PRACTICE 

the  first  method,  the  total  costs  for  the  period  are  divided  into 
the  production  for  the  period,  figured  in  tons,  and  from  this 
figure  is  computed  the  average  per  hundred  pounds  of  castings  or 
malleables  made.  It  is  apparent  that  such  blanket  figures  as 
these  would  be  of  value  only  in  a  foundry  producing  the  same  type 
of  work  and  using  the  same  patterns  day  after  day.  Such  condi- 
tions are  occasionally  encountered  where  malleables  are  being 
manufactured  for  stock,  and  under  these  circumstances  monthly 
tonnage  figures  cover  all  purposes  of  control.  When  the  monthly 
estimated  statement  of  costs  is  compared  with  sales  per  ton,  as 
shown  in  Form  3,  the  record  serves  the  further  purpose  of  showing 
trends. 

A  more  accurate  estimate  necessitates  inventories  of  malle- 
ables and  may  be  made  as  follows : 

Tons       Per  Ton       Amount 

Estimated  at  beginning  of  month 175        $80.00     $14,000.00 

Good  castings  made 550  io5-57        58,063.68 

725  $72,063.68 

Estimated  on  hand  at  end  of  month. .. .        265         $85.00        22,525.00 

Average  cost  of  castings  sold 460  $49,538.68 

Average  per  ton  cost  of  castings  sold 107.69 

Average  selling  price,  as  above i53-i8 

Estimated  profit  per  ton  sold $       45.49 


The  value  of  malleables  on  hand  required  for  this  more 
accurate  estimate  usually  represents  the  value  of  malleables 
in  process  unless  some  large  order  is  being  held  for  shipping 
instructions. 

The  estimated  price  depends  on  whether  the  greater  pro- 
portion of  these  are  in  the  hard  iron  state  at  the  end  of  the  month 
or  whether  more  weight  of  unfinished  material  has  accumulated 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        295 

near  the  fitting  and  assembling  end  of  the  process.     In  other 
words,  how  much  cost  has  accumulated? 

Job  Costs 

In  a  foundry  making  castings  of  every  shape  and  size,  as  most 
foundries  do,  the  only  accurate  method  of  cost-finding  is  that 
of  figuring  costs  on  individual  patterns,  or  by  costs  of  jobs  or 
contracts,  where  contracts  are  made  at  a  flat  price  for  all  require- 
ments, that  is,  for  heavy  and  light  castings,  plain  and  intricate 
shapes.  In  figuring  such  costs,  the  usual  mechanism  of  pro- 
duction order  cost-finding  is  required,  such  as  job  orders  and  cost 
sheets  bearing  the  same  number  and  numbered  consecutively,  to 
which  all  costs  are  charged :  time  tickets  as  previously  described, 
charging  molding,  annealing,  cleaning  time,  etc.,  to  each  job  order; 
requisitions  for  any  special  supplies  used  on  the  order;  and  an 
equitable  method  of  distributing  the  foundry  overhead  over 
individual  patterns  or  contracts  for  mixed  work — a  matter  to  be 
discussed  at  length  later. 

The  method  employed  for  computing  raw  material  costs  for  a 
foundry  differs  from  that  for  a  manufacturing  plant.  The  raw 
material  of  castings  consists  of  the  iron  ore,  coal,  scrap  metal,  etc., 
used  in  the  melt.  To  figure  the  material  costs,  it  is  necessary  to 
apportion  the  whole  cost  of  the  melt  over  the  castings  on  the  basis 
of  weight.  In  the  majority  of  foundries  the  common  practice 
is  to  throw  together  the  cost  of  the  melt,  that  is,  the  cost  of  raw 
material  used,  and  the  labor  cost  of  melting.  While  this  grouping 
of  costs  makes  for  simplicity  in  the  use  of  records,  it  is  bad 
practice  from  the  point  of  view  of  operating  efficiency  and  of 
obtaining  accurate  costs  for  each  pattern  or  contract.  Castings 
of  intricate  design  and  fight  weight  require  much  greater  care  in 
making  than  much  heavier  castings  of  simple  design,  and  there- 
fore the  cost  of  labor  and  of  waste  is  more  for  the  lighter  product. 
Where  accuracy  is  desired,  it  is  necessary  to  keep  a  record  of  the 
labor  cost  appHed  to  the  production  of  each  type  of  casting  and  to 
include  this  charge  in  the  cost  of  the  raw  material. 


296  ACCOUNTING— THEORY  AND  PRACTICE 

Class  Costs 

Since  the  clerical  labor  involved  in  recording  job  costs  for 
each  and  every  pattern  or  for  each  contract  would  usually  make 
the  expense  of  cost-finding  prohibitive,  a  very  close  approxima- 
tion may  be  obtained  by  adopting  a  system  of  classification  which 
will  include  within  its  extreme  limits  all  the  representative  types 
which  come  within  the  scope  of  its  operations.  These  may  be 
classified  and  numbered  by  weight  per  piece;  by  number  of  pieces 
on  a  gate;  by  shape,  simple  or  complex,  whether  they  are  plain 
or  cored  castings.  The  more  detailed  the  classification,  up  to  a 
certain  limit  naturally,  the  greater  will  be  its  service. 

By  recording  test  job  costs  on  these  various  classifications 
from  time  to  time  to  check  their  accuracy,  very  close  approxima- 
tions to  actual  costs  will  be  provided  at  considerably  less  expense. 
It  is  a  great  improvement  over  estimated  prices  based  on  the 
average  cost  per  ton  per  month,  or  per  year,  with  guesswork 
adjustments  for  the  differentiations.  Class  costs  are  also  valu- 
able for  checking  up  costs  and  estimated  profits  on  completed 
contracts  of  large  tonnage  from  a  variety  of  patterns,  or  for 
making  up  a  more  accurate  summary  of  monthly  costs  than  can 
be  obtained  by  the  straight  average  price  per  ton  method. 

If  such  a  system  is  planned  according  to  the  general  principles 
of  job  cost  accounting,  job  costs  on  special  orders  or  special 
patterns  may  be  obtained  with  little  extra  expense  when  they  are 
needed.  In  applying  classification  costs  for  price-quoting  pur- 
poses, melting  and  molding  cost  and  special  pattern  expenses  must 
be  checked  against  market  and  labor  conditions  prevaihng  at  the 
time,  since  prices  of  metals  fluctuate  with  the  market  conditions 
and  the  direct  molding  labor  costs  differ  even  within  the  same 
class  of  castings.  All  other  costs,  however,  may  be  transformed 
into  ratios  above  or  below  the  average  cost  per  ton  for  the  past 
fiscal  period,  which  would  simplify  still  further  the  work  of  esti- 
mating prices  for  new  work. 

A  convenient  classification  for  the  purpose  of  determining 
class  costs  is  as  follows: 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        297 


Weight  per  Piece 

■ 

Weight  per  Mold 

Shape 

Cores 

Class  A 

A- 1  (heavy) 

A-ii  (simple) 

A-iii          (plain) 

(less  than  one  pound) 

A-112         (complex) 

A- 1 2  (complex) 

A-121          (plain) 
A- 1 22          (complex) 

I 

A-2  (medium) 

A-2 1  (simple) 

A-2 1 1-2 1 2 

A-22  (complex) 

A-22 1-222 

A-3  (light) 

A-3 1  (simple) 

A-3 1 1-3 1 2 

A-32  (complex) 

A-32 1-322 

B 

C 

Class  A- 1 1  would  be  of  weight  class  A,  large  mold  (many 
pieces  on  a  gate),  simple  shape,  no  cores. 


Distribution  of  Overhead  Expenses 

Overhead  expense  may  be  distributed  over  the  product 
according  to  one  of  two  methods.  The  conditions  and  the 
degree  of  accuracy  desired  are  the  determining  factors. 

1.  General  factory  overhead  may  first  be  distributed  to  the 
various  departments  and  then  allocated  to  the  product  as  a 
departmental  charge.  The  customary  bases  are  used  for  this 
distribution.  Thus,  rent  is  distributed  on  a  floor-space-occupied 
basis,  insurance  on  a  value  basis,  etc.  Whatever  departmental 
expense  can  be  allocated  directly  to  job  or  class  costs  is  so  handled. 
For  the  allocation  to  the  product  of  the  departmental  indirect 
expense  and  the  general  factory  overhead,  after  the  amount  for 
the  year  or  the  month  has  been  estimated,  three  bases  or  some 
combination  of  them,  are  employed,  viz.,  tonnage,  direct-labor 
cost,  and  direct-labor  (or  machine)  hours.  A  basis  satisfactory 
in  one  department  may  prove  wholly  unsatisfactory  in  another. 
In  the  system  recommended  by  the  national  association,  all 
metal  and  melting  overhead,  as  well  as  hard  and  soft  iron  cleaning. 


298  ACCOUNTING— THEORY  AND  PRACTICE 

annealing,  and  loss  on  malleables  returned,  are  distributed  on 
the  tonnage  basis.  Molding  overhead,  trimming  and  inspection, 
fitting  and  assembling,  shipping,  and  general  expense  are  figured 
as  a  percentage  of  direct-labor  cost  and  distributed  accordingly. 
This  is  not  an  absolute  rule  but  should  be  modified  to  fit  condi- 
tions peculiar  to  a  given  foundry. 

2.  Under  the  second  method  no  attempt  is  made  to  depart- 
mentize  overhead  expenses.  These  are  recorded  in  a  suitable 
general  expense  account  and  distributed  to  the  product  in  one 
item  for  the  entire  factory.  From  a  clerical  standpoint  this 
is  much  simpler,  but,  naturally,  does  not  as  truly  reflect  actual 
cost  conditions  particularly  as  between  simple  and  complex 
types  of  product.  Tonnage  is  the  only  feasible  basis  here,  and, 
excepting  in  a  small  foundry  turning  out  a.  fairly  uniform  type 
of  product,  the  results  obtained  are  not  usually  satisfactory. 

Estimates  and  Quotations 

When  bidding  on  new  work  it  becomes  necessary  to  make  esti- 
mates. Unless  careful  and  accurate  records  of  costs  have  been 
kept,  particularly  as  regards  overhead  expense,  submitting 
quotations  becomes  largely  a  matter  of  guesswork.  For  the 
purpose  of  estimating  costs,  use  of  a  tonnage  basis  exclusively  is 
never  reliable.  Estimate  of  metal  costs  should  always  be  on 
the  basis  of  current  market  quotations;  direct-labor  costs  should 
be  estimated  only  after  the  pattern,  sample,  or  drawing  has  been 
submitted  to  the  superintendent,  as  molding  and  core-making 
direct-labor  costs  depend  largely  on  the  particular  product  and 
cannot  with  accuracy  be  put  on  a  tonnage  basis;  the  overhead 
rates  to  be  apphed  in  each  department  should  be  carefully  ex- 
amined in  connection  with  this  particular  piece  of  work.  Only 
in  this  way  can  satisfactory  quotations  be  made.  After  an  esti- 
mate has  been  made,  the  record  of  it  should  be  preserved  and 
carefully  checked  against  actual  costs  when  the  work  is  done. 

For  purposes  of  illustrating  the  wide  variations  from  average 
costs  which  may  occur  in  castings  of  the  same  weight  having  the 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY       299 


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300       ACCOUNTING— THEORY  AND  PRACTICE 

same  number  of  pieces  on  a  gate,  three  simple  examples  are 
added.  The  special  data  on  which  the  cost  estimates  in  these  ex- 
amples are  based  are  given  in  Form  4,  which  is  used  for  this  pur- 
pose. This  information,  together  with  that  as  to  average  costs 
given  by  Form  3,  is  used  in  the  three  estimates  given  below,  one 
of  which  is  for  castings  to  be  made  according  to  a  pattern  sub- 
mitted, another  according  to  a  sample,  and  the  third  according  to 
a  drawing.  As  mentioned  above,  these  estimates  are  preserved 
for  comparison  with  actual  costs  if  the  contract  is  secured. 

Cost  Summary  Pattern  C-i  (Class  A-ii) 
Metal  8,000  lbs.  @  $1.64 $131.20 

Melting  Loss.  10% 13-12     $144.32 

Melting  11,000  lbs.  @  .48 $  52.80 

Loss  Bad  Castings,  10% 5.28        58.08 

Molding  Direct  Labor 60.00 

Molding  Overhead,  120% 72.00 

Other  Costs  (See  p,  293);      $.195 

•595 
.101 
.09 

.147 

.33       $1,458X80.00      116.64 

80.00)  $451.04 

$  5.638  per  100  lbs. 
Cost  Summary  Pattern  45  (Class  A- 121) 

Metal  8,000  lbs.  @  $1.64 $131.20 

Melting  Loss,  10% 13.12     $144.32 

Melting  11,000  lbs.  @  $.48 $  52,80 

Loss  Bad  Castings,  10% 5.28        58.08 

IVIolding  Direct  Labor 76.80 

Molding  Overhead.  120% 92.16 

Cores  Direct  Labor 12.00 

Cores  Overhead.  150% 18.00 

Special  Pattern  and  Flask  Expense 15.00 

Other  Costs,  as  above 116.64 

80.00)  $533-oo 

$6,663  per  100  lbs. 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        301 

Cost  Summary  Pattern  116  (Class  A- 12 2) 

Metal  8,00c  lbs.  @  $1.64 $131.20 

Melting  Loss,  10% 13-12    $144.32 

Melting  12,000  lbs.  @  $.48 $  57.60 

Loss  Bad  Castings,  10% 5.76        63.36 

Molding  Direct  Labor 1 18.40 

Molding  Overhead,  120% 142.08 

Core  Cost  Direct  Labor 48.00 

Core  Overhead,  150% 72.00 

Special  Pattern  and  Flask  Expense 25.00 

Finishing  Labor 10.00 

Other  Costs*  (See  p.  300)  $1,368  X  80.00 109.44 

80.00)  $732.60 

$9,158  per  100  lbs. 

*The  fitting  and  assembling  cost  of  Log  per  iOO#  is  omitted  from  the  figure  of 
"other  costs"  (I1.458)  used  on  page  300  since  this  cost  is  here  included  in  the  item, 
finishing  labor  (lie). 

Comments  on  Estimates 

The  metal  price  per  100  pounds  of  good  finished  castings  pro- 
duced, is  taken  from  Form  3,  the  estimated  monthly  cost  summary 
(page  293). 

The  melting  loss  of  10%  is  the  estimated  loss  for  a  fiscal  period 
taken  from  reports  sent  in  on  Form  8  (page  311),  or  from  class 
costs  obtained  for  this  particular  kind  of  casting. 

Loss  of  bad  castings  in  process  is  the  estimated  loss  obtained 
from  records  sent  in  on  Form  10  (page  313)  during  a  fiscal  period, 
or  from  established  records  of  class  costs. 

Molding  overhead  is  the  ratio  of  all  indirect  labor  and  other 
costs  of  molding  to  the  direct-labor  cost  of  molding.  This  is  ob- 
tained either  from  a  summarization  of  monthly  costs  into  annual 
costs,  or  from  established  records  for  this  particular  class  of  vv^ork. 

Cores  overhead  is  obtained  by  the  same  process  as  molding. 

Finishing  labor  is  usually  included  in  the  general  or  other 
costs,  except  in  cases  where  some  special  or  unusual  finishing 
process  is  specified  in  the  contract.  Such  costs  would  naturally 
not  be  included  in  any  general  averages  or  even  in  class  averages. 

Other  costs,  in  these  specific  examples,  comprise  all  other 


302  ACCOUNTING— THEORY  AND  PRACTICE 

items  not  included  in  the  detailed  costs  already  mentioned.  For 
purpose  of  simplicity  in  figuring,  they  are  here  given  as  an  aver- 
age cost  per  ton  of  good  finished  castings,  obtained  either  from 
estimated  annual  averages  or  from  established  class  averages. 
Present  figures  are  taken  from  Form  3. 

Pattern  and  flask  expense,  unless  otherwise  agreed,  is  always 
charged  to  the  customer  where  the  patterns  remain  his  property. 

Accounting  for  Stores 

For  the  purpose  of  figuring  job  costs  a  separate  subsidiary 
ledger  is  kept  for  recording  the  receipts  and  disbursements  of 
materials,  supplies,  and  small  tools.  This  ledger  is  controlled 
by  an  account  in  the  general  ledger.  Monthly  verifications  are 
made  systematically  of  part  of  the  record,  and  at  the  end  of  the 
fiscal  period  a  physical  inventory  is  taken  only  of  the  items  which 
represent  large  investments  of  capital  and  which,  if  incorrectly 
recorded,  would  seriously  affect  the  annual  reports. 

The  heavy  raw  materials,  as  explained  previously,  are  stored 
in  a  yard  under  protection  from  the  weather  or  out  in  the  open. 
If  in  bins,  the  bins  have  standard  capacities,  and  if  piled  in  rows, 
the  rows  have  a  standard  number  of  items  in  each  row  for  pur- 
poses of  easy  computation.  These  materials  are  usually  dis- 
bursed on  orders  from  the  superintendent,  while  the  receipted 
slips  are  returned  to  the  office  for  making  proper  stores  and  cost 
records.  The  small  tools,  suppHes,  and  materials  are  kept  in  a 
regukr  stores  department. 

The  stores  requisitions  form  the  basis  for  apportioning  mate- 
rial and  supply  costs  to  be  charged  to  the  cost  of  jobs  in  depart- 
ments. For  pricing  requisitions,  under  one  method  a  particular 
lot  of  material  is  priced  out  at  its  actual  cost  until  the  supply  is 
exhausted,  when  the  price  is  changed  to  conform  to  the  price  paid 
for  the  next  lot  received.  Pricing  the  actual  cost  of  small  tools, 
supplies,  etc.,  in  this  way  will  make  very  little  difference  in  costs. 
If,  however,  the  method  is  applied  to  bulky  raw  materials  at  a 
time  of  fluctuating  prices,  the  cost  figures  will  be  confusing  and 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY       303 

irregular.  It  may  also  be  difficult  to  check  up  monthly  estimates 
with  the  annual  profit  and  loss  statements.  For  such  materials 
the  better  way  is  to  take  the  general  average  price  of  the  entire 
quantity  on  hand  at  the  time  disbursements  are  made,  obtained 
by  dividing  the  balance  of  the  money  value  of  the  two  sides  of  the 
ledger  by  the  balance  of  the  quantity  on  hand,  thus  providing  a 
changing  average  which  will  equalize  the  costs  for  monthly  summa- 
ries but  cannot  be  used  in  figuring  prices  on  new  work,  if  such 
contracts  would  necessitate  additional  purchases  at  prices  above 
or  below  this  average.  For  pig  iron  and  other  bulky  raw 
materials  this  average  cost  of  material  on  hand  is  the  safest  price 
to  use.  For  all  items  of  little  value,  either  cost  may  be  used 
because  results  are  not  affected  to  any  marked  degree. 

A  type  stores  ledger  sheet  is  shown  in  Form  5.  Sometimes  stores 
records  have  additional  columns  for  Material  Ordered,  Material  Ap- 
plied on  Orders,  and  Material  on  Hand  with  the  usual  subdivisions. 

Inventories 

The  stores  record  represents  a  perpetual  inventory  of  mate- 
rials on  hand  which  has  been  verified  in  sections  throughout  the 
fiscal  period.  At  the  close  of  the  fiscal  period,  however,  pig  iron 
and  other  valuable  materials  and  supplies  are  inventoried  care- 
fully, because  errors  in  these  items  may  seriously  affect  the  profit 
and  loss  statement.  It  is  necessary  also  to  have  the  unused 
material  and  supplies  in  the  various  departments  inventoried. 
Tools  charged  to  departments  during  the  year  are  checked  up. 
This  work  is  in  charge  of  the  various  foremen  whose  record  of 
count  is  OK'd  by  the  superintendent.  The  difficult  problem 
is  always  that  of  counting  and  valuing  the  product  in  process. 
Where  the  foundry  is  shut  down  for  repairs  during  the  inventory 
period  and  the  majority  of  large  contracts  have  been  completed, 
inventory- taking  is  a  simple  matter.  Where  operation  continues 
uninterruptedly  during  inventory-taking  time,  it  will  be  necessary 
to  estimate  the  weight  of  castings  unfinished  in  each  department 
in  order  to  get  a  correct  value  for  unfinished  malleables  on  hand. 


304  ACCOUNTING— THEORY  AND  PRACTICE 

In  order  to  do  this  with  any  assurance  of  accuracy  it  is  quite 
essential  that  cost  records  by  departments  shall  have  been 
compiled.  Metal  and  direct-labor  costs  plus  the  accrued  over- 
head in  the  several  departments,  with  adjustment  for  the  degree 
of  uncompleteness  in  a  department,  will  give  the  value  of  malle- 
ables  in  process. 

A  method  used  by  some  foundries  for  inventorying  malle- 
ables  in  process  is  to  hold  the  inventory  record  open  until  the 
completion  of  all  such  malleables,  keeping  careful  record  of  all 
costs  incurred  after  the  date  of  inventory.  Subtracting  these 
costs  from  the  cost  of  the  finished  malleables,  figured  in  the  cus- 
tomary way,  gives  the  value  of  malleables  in  process  at  the  date 
of  inventory.  Under  this  plan  as  each  department  completes  its 
imfinished  work,  it  is  closed  down  for  a  brief  space  to  prevent 
confusion  with  the  new  work  of  the  next  fiscal  period. 

A  method  very  frequently  used  includes  in  one  amount 
finished  and  process  malleables  on  hand  at  the  close  of  the  period. 
This  is  done  by  subtracting  the  cost  of  shipments  during  the 
period  from  the  sum  of  the  opening  inventory  and  full  cost  of 
production  during  the  period.  The  cost  of  shipments  is  taken  at 
the  average  cost  of  the  period's  production  of  finished  malleables. 
This  rule-of-thumb  method  must  not  be  used  blindly  and  is  open 
to  some  objection.  It  is  usually  true,  however,  that  there  is 
seldom  a  large  accumulation  of  stock  awaiting  shipment. 

At  inventory  time  the  equipment  should  be  carefully  inspected 
for  abnormal  depreciation  and  obsolescence  and  losses  during  the 
period  In  addition  to  this,  conservative  accounting  practice  re- 
quires certain  reserves  to  be  set  aside  to  cover  any  loss  in  value  of 
inventories  or  equipment  due  to  lower  trends  of  price  levels. 

Construction  Work 

When  construction  work  of  any  importance  is  authorized  by  the 
management,  the  limits  of  cost  should  be  carefully  prescribed  and 
followed.  If  contracts  are  let  to  outsiders  all  expenses  incidental 
thereto  and  incurred  by  reason  of  the  construction,  are  a  legitimate 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        305 

charge  to  the  cost  of  the  asset  acquired.  If  the  construction,  how- 
ever, is  done  with  company  workmen,  very  careful  records  have 
to  be  kept  by  all  departments  furnishing  either  labor  or  material 
for  the  new  work.  Inaccuracies  in  accounting  for  costs  of  new 
assets  always  react  on  the  operating  profit  and  loss  for  the 
period. 

The  account.  Additions,  Betterments,  and  Permanent 
Improvements,  accumulates  all  costs  of  material  purchased 
directly  for  new  construction,  the  labor  specially  employed  or 
diverted  from  the  operating  force,  and  the  materials  used  from 
stores  or  departments  using  materials  charged  to  them  for  operat- 
ing purposes.  This  information  is  accumulated  from  the  dis- 
bursement vouchers,  from  pay-roll  distribution  sheets,  and  from 
requisitions  on  the  stores  department  or  from  special  statements 
of  department  heads.  All  time  put  in  by  the  superintendent  and 
foremen  is  carefully  recorded  also.  The  forms  for  recording 
special  work  of  blacksmiths,  pattern-makers,  carpenters,  may  be 
used,  or  a  special  blank  of  a  different  color  or  form  may  be  devised 
for  each  piece  of  new  construction.  The  percentage  of  overhead 
is  estimated  and  a  statement  of  total  cost  of  construction  is  made 
out.  This  statement,  supported  by  the  necessary  original  records 
forms  the  basis  of  the  valuation  of  the  new  asset.  The  amount 
is  credited,  through  journal  entry,  to  the  Additions,  Betterments 
and  Permanent  Improvements  account,  and  debited  to  the  new 
asset  account.  At  the  end  of  a  fiscal  period,  the  account.  Addi- 
tions, Betterments,  etc.,  represents  only  the  total  of  expenditures 
for  unfinished  assets  in  process  of  construction. 

Financial  Records 

Since  the  general  books  of  account  and  the  method  of  record- 
ing financial  transactions  do  not  differ  from  the  practices  of  good 
general  accounting  procedure,  it  will  not  be  necessary  to  describe 
them.  Such  records  differ  everywhere  with  the  nature  of  the 
work  performed  and  the  size  of  the  foundry,  or  the  policy  of  the 
management.    The  balance  sheet  and  statement  of  profit  and  loss 

VOL.  Ill — 20 


306  ACCOUNTING— THEORY  AND  PRACTICE 

to  follow  indicate  the  typical  accounts  required  for  the  financial 
management  of  a  foundry. 

Balance  Sheet  Items 

Assets 

Current  Assets: 

Cash $ 

Bills  Receivable 

Accounts  Receivable 

Malleables  on  Hand: 

Finished  and  in  Process 

Inventory : 

Unused  Tools  and  Supplies  in  Departments 

Stores: 

Metal  on  Hand 

Material,  Tools  and  Supplies $ 

Deferred  Items: 

Interest,  Taxes,  Insurance,  Royalties $ 

Fixed  Assets: 

Land  and  Buildings 

Machinery 

Furnaces  and  Ovens 

Patterns 

Flasks,  Bottom  Boards,  etc 

Plant  Equipment 

Stable  Equipment 

Office  Equipment 

Additions  and  Betterments  Uncompleted 

Total  Assets $ 

Liabilities 

Current: 

Notes  Payable $ 

V^ouchers  Payable 

Accrued  Wages ■ 

Unclaimed  Wages $ 

Reserves: 

Depreciation  Fixed  Assets $..,... 

Income  Tax  Payable 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        307 

Inventory  Adjustments 

Plant  Equipment  Adjustments 

Total  Liabilities $ 

Net  Worth 

Capital  Stock $ 

Surplus 

Profit  and  Loss  for  Period 

Total  Net  Worth $ 


Profit  and  Loss  Statement 

Sales  for  Period \ 

Deduct: 

Freight  on  Sales $ 

Malleables  Returned 

Net  Sales 

Manufacturing  Cost: 

Metal \ 

Melting 

Molding 

Cores 

Trimming — Hard  Iron 

Annealing 

Cleaning — Soft  Iron 

Fitting  and  Assembling 

Shipping 

Annealing  Pots  and  Bottoms 

Fuel 

Sand  Brick  Clay 

Grate  Bars,  etc 

Special  Pattern  and  Flask  Expense 

Adjustment — Inventory  Valuations 

Adjustment — Equipment  Valuations 

Adjustment — Stores  Ledger  Inventories 

Repairs  and  Maintenance 

Miscellaneous  Shop  Expense 

Miscellaneous  Freight  Charges 

Depreciation,  Taxes,  Insurance 

Malleables: 

Initial  Inventory $ 

Final  Inventory 


308       ACCOUNTING— THEORY  AND  PRACTICE 

Administration  Expense: 

Salaries 

Traveling  Expenses 

Legal  Expenses 

Stationery,  Printing 

Advertising 

Telephone  and  Telegraph 

Insurance,  Taxes,  Depreciation 

Miscellaneous  General  Expense 


Operating  Profit $ . 

Other  Income  and  Expenses: 
Income: 

Discount  on  Purchases $ 

Interest  on  Investments 

Adjustment  Fixed  Asset  Values $ 


Expenses: 

Income  Taxes  Reserves $ . 

Special  Reserves 

Special  Depreciation 

Special  Losses 

Discount  on  Sales _. 

Net  Income 


III.     Statistical  and  Control  Summaries 

Superintendent's  Individual  Car  Record 

For  statistical  and  control  purposes,  a  number  of  subsidiary- 
records  are  kept  which  need  brief  discussion.  As  stated  before, 
since  the  stores  ledger  records  only  quantities  and  values,  the 
superintendent  usually  keeps  an  independent  card  record  (Form 
6)  of  each  car  of  iron,  the  brand,  car  number,  location  in  the  yard, 
and  chemical  analysis.  The  shipper's  analysis  is  transmitted  on 
the  invoice.  Where  the  foundry  has  a  special  laboratory  of  its 
own,  the  laboratory  analysis  may  be  entered  in  red  ink  directly 
below  the  shipper's  analysis,  for  purposes  of  comparison.  For 
convenience  and  ready  reference  these  cards  may  be  filed  by 
brand  or  firm  name,  by  date  of  receipt,  by  analysis  of  the  silicon, 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        309 


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310 


ACCOUNTING— THEORY  AND  PRACTICE 


or  in  two  divisions — full  cars  and  partially  used  cars — in  combi- 
nation with  some  other  classification.  If  cards  are  filed  by  analysis 
a  signal  system  will  be  very  useful.  White  signals  may  be  used 
where  the  analysis  is  normal.  Different  colors  may  be  selected 
to  show  either  high  or  low  percentages  in  each  of  the  four  analyses. 
By  this  method  the  superintendent  can  tell  at  a  glance  whether  or 
not  he  has  on  hand  elements  which  will  neutralize  high  or  low  ele- 
ments of  other  car-lots,  and  much  time  and  energy  will  be  saved  in 
selecting  the  metals  for  the  superintendent's  daily  melting  order. 

The  receipts  side  of  this  form  is  filled  in  from  the  stores  record 
of  invoices  received,  and  the  disbursements  side  from  the  melting 
order  sent  out  by  the  superintendent  and  later  signed  and 
returned  by  the  foreman  of  the  melting  department.  In  the  use 
of  this  form  one  line  of  the  Analysis  column  is  used  for  the 
shipper's  analysis  while  the  line  beneath  shows  the  analysis  made 
by  the  chemist  at  the  foundry  laboratory  and  entered  on  the 
form  in  red  ink.     A  new  card  is  used  for  each  car. 

Superintendent's  Melting  Order 

From  his  car  records  the  superintendent  makes  out  a  melting 
order  (Form  7).  This  is  the  official  order  for  the  metal  to  be 
loaded  into  each  furnace  for  the  daily  melt.  After  the  metal  has 
been  delivered  to  the  furnaces,  the  foreman  in  charge  signs  it, 


SUPERINTENDENT'S  MELTING  ORDER 

Date 

Material 

Car  No. 

Pile  No. 

Brand  or 
Firm  Name 

Furnace 
Number 

Weights                 | 

Estimated 

Actual 

Pig  Iron 

Steel 

Mall.  Scrap 

Hard  Iron 

- 



— ■ 1 

1 ^ 

Supt. 

0 

K                                   Foreman                | 

Form  7.     Superintendent's  Melting  Order 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        311 


the  exact  weight  is  added  opposite  the  original  estimate,  and  the 
slip  is  returned  to  the  superintendent  or  the  stores  clerk  in  order 
to  make  the  book  records  on  the  stores  ledger  as  well  as  on  the 
card  record  for  individual  cars.  The  information  on  the  sh'ps 
is  summarized  at  the  end  of  each  week  or  month  for  the  cost 
records.  Slips  are  filed  by  months  for  purposes  of  checking  up 
errors  in  estimated  melting  losses,  etc. 

Daily  Summary  of  Metals  Melted 

From  the  melting  orders  and  the  records  of  the  pay-roll  and 
hard  iron  cleaning  departments,  a  daily  summary  of  metals 
melted,  and  loss  in  melting  is  made  up  (Form  8).  This  is  an 
important  control  record.     From  it  the  work  of  careless  molders, 


DAILY  SUMMARY  OF  METALS  MELTED 


Date. 


Metals  Charged 


Furnace  #1 
Furnace  #2 
Furnace  #3 

Total 


Pig  Iron 


Steel 


Mall. 


Sprue 


Total 


Scrap  Returned 

Total  Weight  of  Metal  Melted 

Weight  Good  Castings 

Weight  Annealing  Pots  and  Bottoms. 

Weight  Miscellaneous  Repairs 

Melting  Loss 

Per  cent  charge 

Fuel  Used 

Per  ton  of  metal 


Form  8.     Daily  Summary  of  Metals  Melted 


312 


ACCOUNTING— THEORY  AND  PRACTICE 


poor  patterns,  and  bad  melting  practice  may  be  detected  before 
expense  accumulates  and  heavy  losses  are  incurred. 

Monthly  Summary  of  Unfilled  Orders 

Another  control  record  is  the  summary  of  unfilled  orders  for 
purchases  and  sales  (Forms  9  a  and  b).  This  record  calls  atten- 
tion to  the  condition  of  pig  iron  shipments  and  the  status  of  cur- 
rent contracts.     It  is  a  good  index  of  general  conditions  of  trade. 


MONTHLY  SUMMARY  OF  PIG  IRON  CONTRACTS  VS. 
UNFILLED  ORDERS 

On  Hand  January  i 

Received  Month  January .  .  . 

Used  Month  January 

On  Hand  February  i 

Unfilled  Contracts  February  i 

Pig  Iron 

Steel  Scrap 

Malleable  Scrap 

Unfilled  Malleable  Tonnage  ( 

See  Form  9b) 

Form  g.   [a)     Monthly  Summary  of  Pig  Iron  Contracts  vs.  Unfilled  Orders 

Unfilled  Tonnage  January  i Tons 

Received  during  Month: 

Large  Contracts  (specify  names) 

Small  Orders  (totals  only) 

Shipments  Month  of  January 

Unfilled  Tonnage  February  i 


Form  g.     {b)   Unfilled  Orders  for  Malleable  Iron  Castings 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        313 

Summary  of  Losses  in  Manufacture 

Supplementing  this  record  is  another  monthly  record  of  the 
losses  during  the  manufacturing  processes.  (See  Form  10.) 
During  the  regular  season  when  volume  of  output  runs  somewhat 
even,  there  will  be  little  difficulty  in  checking  up  on  this  record, 
but  at  times  when  heavy  and  light  castings  are  being  made  at 
the  same  time,  or  when  delays  occur  in  any  department,  the 
overlapping  malleables  in  process  at  the  end  of  a  cost  period 
may  not  give  accurate  records.     However,  the  records  for  the  en- 


SUMMARY  OF  LOSSES  IN  MANUFACTURE  MALLEABLE 
IRON  CASTINGS 


Melting  Loss: 
Total  Metal  Charged:  Pounds       Per  Cent 

Pig  Iron 

Steel 

Scrap ICO 


Metal  Melted: 

Hard  Iron  Castings 

Gates  and  Sprues 

Misrun  Castings 

Repair  Materials 

Melting  Loss 

Other  Losses: 

Hard  Iron  Castings  (customers') 
Losses: 

Molding  Loss 

Annealing  Loss 

Fitting  and  Assembling 

Shipping 

Good  Finished  Castings  Produced . 


Form  10.     Summary  of  Losses  in  Manufacture 


314  ACCOUNTING— THEORY  AND  PRACTICE 

tire  fiscal  period  will  be  a  valuable  guide  to  figuring  future  costs. 
Unusual  or  special  classes  of  castings  may  be  followed  through 
the  foundry  on  a  job  cost  basis  to  ascertain  exact  losses  en 
route. 

Use  of  Charts 

While  it  is  necessary  to  provide  a  well-selected  system  of 
periodical  reports  in  order  to  permit  the  busy  executive  to  keep 
in  mind  the  many  details  connected  with  his  own  foundry  and 
with  general  foundry  conditions  throughout  the  country,  he  can- 
not get  from  figures  alone  as  clear  a  perspective  of  the  general 
and  special  trends  past  and  present  as  he  can  from  statistical 
charts.  Some  of  these  may  be  summaries  of  wide  general  trends 
while  others,  more  detailed,  will  explain  the  reasons  for  the 
fluctuations  in  general  trends. 

Also  it  is  a  comparatively  simple  matter  to  prove  to  a  board 
of  directors  the  why  and  how  of  progress  or  retrogression,  when 
they  can  see  a  picture  of  the  whole.  Directors  and  stockholders 
are  not  as  much  interested  in  details  as  they  are  in  results,  that  is, 
the  income  and  increasing  value  of  their  investment. 

For  long-time  charts,  and  for  charts  carrying  details  of  both 
high  values  and  very  low  values,  a  better  visualization  of  percent- 
age fluctuations  is  afforded  by  the  use  of  semilogarithmic  paper. 
Several  useful  general  charts  are  suggested.  Since  these  are 
made  up  from  periodical  reports  compiled  in  the  accounting 
department,  very  little  additional  work  is  required  to  keep  them 
up  after  they  have  once  been  planned  and  started. 

I .  Operating  chart,  by  months  only,  continued  over  a  period 
of  years  to  show : 

(a)  Price  of  pig  iron  per  ton 

(b)  Cost  of  molding  per  ton 

(c)  Cost  of  cores  per  ton 

(d)  All  other  costs 

(e)  Total  cost  per  ton 

(f)  Selling  price  per  ton 


ACCOUNTING  FOR  MALLEABLE  IRON  INDUSTRY        315 

Molding  costs  per  ton  increase  with  light  or  intricate  patterns, 
but  decrease  with  heavy  or  uncored  plain  patterns.  When 
molding  costs  increase  more  rapidly  than  general  costs,  it  indi- 
cates a  more  complex  line  of  product,  or  inefficiency  in  the 
molding  department.  If  there  has  been  an  increase  in  core  costs 
as  well,  this  would  tend  to  substantiate  the  first  reason. 

Molding  and  core  costs  per  ton  may  conform  to  the  foundry- 
average,  but  the  other  costs  may  increase  with  seasonal  fluctu- 
ation in  the  labor  market,  increased  administrative  expenses, 
or  inefficiency  of  management.  The  latter  are  not  always  easy 
to  detect  except  by  use  of  graphic  charts  to  show  percentage 
fluctuation  over  a  number  of  periods. 

Charts  should  never  be  used  bHndly.  Tendencies  on  one 
chart  should  be  checked  carefully  with  relevant  data  on  other 
charts,  else  wrong  conclusions  are  very  apt  to  be  drawn. 

2 .  Pig  iron,  ordered,  received,  used,  on  hand,  unfilled  orders  of 

malleables  all  shown  in  tons.  (See  Form  9a.)  Past  his- 
tory is  useful  to  show  policies  of  purchasing  and  trend  of 
prices  and  forms  a  basis  for  future  plans  of  management. 

3.  Tonnage  losses  in  manufacturing  throughout  the  various 

departments.  (See  Form  10.)  This  will  stimulate 
better  shop  practice. 

4.  Capital,  surplus,  profit  and  loss,  dividends.    This  is  of 

interest  to  stockholders,  bondholders,  banks,  creditors, 
also  prospective  purchasers.  It  shows  the  policy  of  the 
directors  in  financial  matters  over  a  long  period  of  time. 

5.  Tons  made,  tons  shipped.     (See  Form  3.)     In  a  jobbing 

foundry  the  two  should  be  close  together,  especially  if 
the  chart  is  made  a  cumulative  one.  A  cumulative  and 
a  monthly  chart  could  be  plotted  to  advantage  on  the 
same  sheet.  If  considered  desirable  the  average  cost  per 
ton  and  average  selling  price  per  ton  may  be  included. 


CHAPTER  IX 

CONTRACTORS'  ACCOUNTS 

By  Thomas  W.  Byrnes  and  K.  Lanneau  Baker 

I.  The  Business  of  Contracting 

Contracting — Past  and  Present 

A  contractor  may  be  defined  as  one  who  agrees  to  execute 
certain  work  for  a  specified  or  definitely  ascertainable  sum.  The 
work  may  consist  of  performing  labor  alone,  or  it  may  include  the 
furnishing  of  materials  as  well  as  labor.  The  same  broad  prin- 
ciples of  accounting  apply  to  all  contractors,  regardless  of  the 
industry  in  which  they  are  engaged.  It  is  the  purpose  here  to  set 
forth  these  principles  as  they  pertain  to  the  accounts  of  contrac- 
tors in  the  building  trades. 

In  recent  years  great  changes  have  been  wrought  in  the  busi- 
ness methods  of  contractors.  In  the  vitally  important  depart- 
ment of  estimating,  the  building  contractor  of  earlier  times  relied 
solely  on  his  own  judgment,  which  was  formed  from  personal 
experience.  His  work  was  supervised  by  practical  men,  few  of 
whom  had  the  advantage  of  technical  training.  In  many  in- 
stances his  methods  of  financing  were  crude,  collections  being 
made  from  owners  who  had  funds  to  spare,  and  payments,  other 
than  pay-rolls,  being  made  when  there  was  a  surplus  of  cash. 
Accounts  with  owners  were  considered  all-important,  and  con- 
stituted the  main  object  of  account-keeping.  All  costs'  were 
approximated,  owing  to  the  absence  of  accurate  cost  records. 
Hence  serious  deviations  from  original  estimates  could  not  be 
learned  until  the  completion  of  the  work,  and  then  they  could  not 
be  traced,  nor  could  responsibility  for  them  be  accurately  placed. 

Operating  in  this  random  manner,  the  contractor  made  and 

316 


CONTRACTORS'  ACCOUNTS  317 

lost  money;  and  so  long  as  his  competitors  operated  in  the  same 
way  and  his  gains  exceeded  his  losses,  he  was  able  to  continue  in 
business.  The  large  profits  made  in  some  instances  attracted  a 
new  and  more  aggressive  element  to  the  business,  and  competition 
became  keener.  The  newcomers  possessed  the  theoretical  knowl- 
edge the  old  contractors  lacked,  and  this  technical  training,  com- 
bined with  the  experience  of  practical  assistants,  resulted  in  the 
submission  of  estimates  prepared  on  a  scientific  basis.  The  busi- 
ness of  the  old  contractors  declined  as  a  result,  and  in  order  to 
obtain  work  at  all,  they  were  obliged  to  reduce  their  bids  until 
they  found  that  in  the  cases  in  which  they  were  the  successful 
bidders,  losses  usually  resulted. 

At  first  it  was  thought  that  the  newcomers  were  obtaining 
contracts  simply  by  underbidding  all  competitors,  and  were  tak- 
ing losses  merely  to  establish  themselves,  hoping  to  recoup  later 
when  the  older  contractors  had  been  eliminated;  but  it  soon  be- 
came evident  that  this  was  not  the  case  and  that  the  newcomers 
were  actually  making  a  profit  on  the  work  awarded  to  them.  It 
was  obvious  then  that  something  was  wrong  with  the  antiquated 
system  of  operating,  and  that  a  change  had  to  be  made  if  the  older 
contractors  were  to  endure.  A  study  was  made  of  the  advantages 
to  be  gained  by  the  newer  methods,  with  the  result  that  engineer- 
ing school  graduates  were  added  to  the  contractors'  staffs  to 
gather  reliable  information.  In  order  to  follow  and  check  up  the 
estimates  as  the  work  progressed,  and  to  enable  the  executives  to 
control  intelligently  the  finances  of  the  business,  a  comprehensive 
system  of  accounting  was  also  necessary.  These  changes,  added 
to  his  experience  gained  through  many  years  of  actual  construc- 
tion work,  have  placed  the  old  contractor  in  a  position  to  survive 
the  test  of  close  competition. 

Building  Contracting  Procedure 

Building  is  the  art  of  erecting  houses  and  other  edifices.  At 
the  head  of  the  building  trade  is  the  architect  who  devises  the 
exterior  of  the  building  and  the  interior  arrangement.     The 


31 8       ACCOUNTING— THEORY  AND  PRACTICE 

land-owner  engages  an  architect,  who,  after  considering  the  size 
and  shape  of  the  lot,  and  the  style  of  the  building  desired,  pre- 
pares and  submits  plans;  or  this  operation  may  take  the  form  of  a 
competition  between  a  number  of  architects,  each  submitting  his 
individual  plan  for  the  proposed  structure,  the  owner  selecting 
the  most  acceptable  set  of  plans.  It  is  customary  for  the  archi- 
tect to  submit  also  specifications  of  materials  required  in  the 
construction  of  the  proposed  edifice.  Builders  undertake  work  by 
contract,  and  for  the  purpose  of  tendering  bids,  these  specifica- 
tions, together  with  the  working  plans  or  drawings  for  the  build- 
ing, are  sent  to  a  number  of  contractors,  who  in  turn  submit  parts 
to  dealers  in  materials  for  estimates  as  to  the  cost  of  such  mate- 
rials delivered  at  the  required  point.  Upon  receipt  of  these  es- 
timates, the  contractor  computes  the  cost  of  the  labor  required,  if 
it  is  to  be  done  by  his  own  organization,  or  secures  bids  from  a 
subcontractor  for  the  parts  of  the  work  which  he  does  not  care  to 
perform  himself.  The  material,  labor,  and  burden  figures  are 
then  assembled  and  on  their  basis  a  bid  is  decided  on  and  sub- 
mitted to  the  architect  or  to  the  owner.  If  his  bid  is  successful, 
a  formal  contract  is  entered  into  with  the  owner. 

The  architect  advises  the  owner  as  to  the  acceptance  of  the 
contractors'  bids.  He  also  supervises  and  directs  the  work,  and 
in  this  capacity  is  the  interpreter  of  the  conditions  of  the  contract 
and  the  judge  of  its  performance.  He  approves  all  payments  to 
the  contractors,  in  accordance  with  the  terms  of  the  contract. 
As  agent  of  the  owner  he  has  authority,  as  provided  in  the  con- 
tract, to  stop  the  work  whenever  it  is  necessary  to  insure  the 
proper  execution  of  the  contract. 

Types  of  Contract 

The  foregoing  is  the  customary  procedure  followed  when  the 
contract  is  entered  into  between  the  owner  and  the  contractor  on  a 
flat-sum  basis,  the  contractor  agreeing  to  do  the  work  for  a 
stipulated  amount,  which  will  include  his  profit.  Contracts  of 
this  nature  are  often  unsatisfactory,  due  to  the  many  opportuni' 


CONTRACTORS' ACCOUNTS  319 

ties  open  to  unscrupulous  contractors  to  restrict  their  costs.  The 
disadvantages  of  this  type  of  contract  have  been  recognized  by 
many  owners,  and  they  have  found  another  way  of  initiating  con- 
tractual obligations  between  themselves  and  the  contractors  in 
the  cost-plus  contract,  in  which  the  contractor  agrees  to  minimize 
the  cost  of  construction  and  to  be  paid  a  fixed  percentage  of  the 
total  cost,  or  the  sum  agreed  upon  at  the  time  of  the  closing  of  the 
contract. 

It  would  seem  at  first  glance  that  this  form  of  contract  would 
favor  the  contractor,  because  he  is  assured  of  a  profit  in  any 
event,  and  is  freed  from  all  concern  as  to  labor  and  material 
fluctuations  during  the  progress  of  the  work.  The  owner's  inter- 
est is  protected,  however,  by  the  architect  who  appoints  a  "clerk 
of  the  works,"  to  be  paid  by  the  owner  and  to  be  constantly  on 
the  ground  during  working  hours.  The  clerk  sees  to  it  that  the 
specifications  are  faithfully  adhered  to  so  far  as  possible.  He 
reports  any  seeming  fault,  and  sees  that  no  unnecessary  expenses 
are  incurred. 

To  protect  the  owner  further  from  the  unscrupulous  contractor, 
who  might  be  tempted  to  purchase  materials  and  labor  at  the 
highest  prices  in  order  to  increase  the  cost  on  which  his  commis- 
sion is  based,  two  methods  have  been  devised  to  limit  the  cost  in 
connection  with  the  cost-plus  contract.  In  the  first  method,  a 
clause  is  inserted  in  the  contract  guaranteeing  to  the  owner  that 
the  entire  cost  of  the  project,  including  the  contractor's  compensa- 
tion, will  not  exceed  a  specified  maximum  simi.  This  guaranty 
forces  the  contractor  to  watch  his  costs  carefully  if  he  would  keep 
his  commission  intact.  The  other  method  is  the  profit-sharing 
plan,  whereby  the  contractor  shares  in  any  saving  effected  by  him 
on  the  difference  between  the  guaranteed  cost  and  the  actual  cost. 
This  is  done  to  give  the  contractor  an  incentive  to  keep  the  costs 
down,  consistent  with  proper  construction.  In  cases  of  this  kind 
it  is  customary  to  allow  the  contractor  a  much  larger  percentage 
of  the  saving  than  he  would  have  earned  were  the  same  amount 
expended  in  costs. 


320       ACCOUNTING— THEORY  AND  PRACTICE 

In  all  forms  of  the  cost-plus  contract,  the  owner  is  entitled  to 
examine  all  invoices,  pay-rolls,  and  receipts  for  other  expendi- 
tures. The  owner  may  also  require  the  contractor  to  supply  a 
bond  to  insure  the  proper  performance  of  the  contract  and  the 
payment  of  obligations  arising  thereimder.  The  bond  must  be  in 
such  form  as  the  owner  may  prescribe  and  with  such  sureties  as 
he  may  approve.  If  a  bond  is  required  by  instructions  given  pre- 
vious to  the  receipt  of  bids,  the  premium  is  paid  by  the  contrac- 
tor ;  if  subsequently,  the  premium  is  paid  by  the  owner. 

Insurance 

The  liability  for  injuries  to  workmen  and  destruction  of  the 
property  by  fire  while  in  the  course  of  construction  have  been  so 
universally  recognized  that  it  is  customary  for  the  contract  to 
contain  clauses  providing  that  the  contractor  shall  maintain  such 
insurance  as  will  protect  him  from  claims  under  the  workmen's 
compensation  acts  and  from  any  other  claims  for  damages  for 
personal  injuries,  including  death,  which  may  arise  from  opera- 
tions under  the  contract,  whether  such  operations  be  by  the 
contractor  himself,  a  subcontractor,  or  by  one  directly  or  in- 
directly employed  by  either  of  them.  The  owner  may  require 
that  the  insurance  certificates  shall  be  submitted  to  him  in  order 
that  he  may  be  assured  of  the  adequacy  of  the  protection.  It  is 
customary  for  the  owner  also  to  carry  insurance  to  protect  himself 
from  contingent  liability  for  damages  due  to  the  same  causes. 
He  is  also  obliged  to  eflfect  and  maintain  fire  insurance  on  the 
entire  structure  on  which  the  work  of  the  contract  is  to  be  per- 
formed, and  upon  all  materials  delivered  in  the  premises,  to  at 
least  80%  of  the  insurable  value.  In  this  instance  he  acts  as 
trustee  for  whomever  it  may  concern,  and  any  less  is  adjustable 
with,  and  payable  to,  him  as  such.  The  contractor  is  entitled  to 
inspect  all  fire  insurance  policies,  and  if  the  owner  fails  to  carry 
sufficient  protection  against  fire,  the  contractor  may  insure  his 
own  interest  and  charge  the  cost  to  the  owner. 

To  limit  their  liability,  and  also  in  order  that  assets  accu- 


CONTRACTORS'  ACCOUNTS  321 

mnlated  over  a  period  of  years  may  not  be  lost  through  claims 
resulting  from  a  serious  accident  which  would  not  be  covered  by 
insurance,  contractors  sometimes  incorporate  a  separate  company 
to  prosecute  a  large  or  particularly  hazardous  engagement. 

Time  Limits  and  Payments 

The  terms  under  which  the  contract  has  been  awarded  and  the 
payments  are  to  be  made  are  all  set  forth  in  the  contract  itself. 
In  many  cases  a  clause  is  inserted  placing  a  time  limit  on  the 
completion  of  the  work,  with  stated  penalties  for  delays,  except 
where  postponements  are  quite  beyond  the  control  of  the  con- 
tractor. When  an  owner  is  in  urgent  need  of  the  premises,  either 
for  his  own  occupancy,  or  for  the  revenue  they  are  expected  to 
yield,  a  bonus  is  sometimes  offered  the  contractor  to  effect  the 
completion  of  a  building  in  advance  of  the  time  limit.  The  stand- 
ard form  of  contract  stipulates  that  all  time  limits  are  of  the 
essence  of  the  contract,  and  that  the  law  of  the  place  of  the  build- 
ing shall  govern  in  the  interpretation  of  the  contract. 

All  payments  made  by  the  owner  are  based  on  statements  of  the 
architect  certifying  that  the  contractor  is  entitled  to  the  amount 
specified.  The  kind  of  contract  usually  governs  the  method  of 
payment.  In  flat-sum  contracts  the  payments  are  based  on  the 
amount  of  work  performed  during  a  specified  time,  or  necessary 
to  carry  the  work  to  a  designated  point  of  completion.  In  cost- 
plus  contracts  it  is  customary  to  reimburse  the  contractor  for  his 
outlay  of  the  previous  month,  each  payment  including  also  the 
agreed  per  cent,  based  on  costs  incurred  during  the  month,  to 
cover  compensation  to  the  contractor,  according  to  contract. 
But  neither  the  final  certificate  nor  the  final  payment  relieves 
the  contractor  of  responsibility  for  faulty  materials  or  work- 
manship. He  is  required  to  remedy  any  such  defects  and  to  pay 
for  any  damage  to  other  work  resulting  therefrom  which  will 
appear  within  a  period  of  two  years  from  the  time  of  installa- 
tion. It  is,  of  course,  incumbent  on  the  owner  to  give  notice  of 
defects  with  reasonable  promptness. 


VOL.  Ill — 21 


322 


ACCOUNTING— THEORY  AxMD  PRACTICE 


Standard  Forms  of  Contracts 

The  American  Institute  of  Architects  issues  standard  building 
contract  documents,  which  include  the  following: 

1.  Form  of  agreement  and  general  conditions  of  the  contract 

2.  Bond  of  suretyship 

3.  Form  of  subcontract 

4.  Letter  of  acceptance  of  subcontractor's  proposal 

Some  idea  of  the  scope  of  the  general  conditions  of  the  con- 
tract, which  deal  at  length  with  the  relations  and  duties  of  the 
owner,  architect,  and  contractor  to  each  other,  may  be  gained  from 
the  following  index  to  the  articles  of  the  general  conditions  in  the 
standard  contract  form  of  the  American  Institute  of  Architects : 


1.  Definitions 

2.  Documents 

3.  Details  and  Instructions 

4.  Copies  Fiirnished 

5.  Shop  Drawings 

6.  Drawings  on  the  Work 

7.  Ownership  of  Drawings 

8.  Samples 

g.  The  Architect's  Status 

10.  The  Architect's  Decisions 

11.  Foremen,  Supervision 

12.  Materials,     Appliances,     Em- 

ployees 

13.  Inspection  of  Work 

14.  Correction  Before  Final  Pay- 

ment 

15.  Deductions     for     Uncorrected 

Work 

16.  Correction  after  Final  Payment 

17.  ProtectionofWorkandProperty 

18.  Emergencies 

19.  Contractor'sLiability Insurance 

20.  Owner's  Liability  Insurance 

21.  Fire  Insurance 

22.  Guaranty  Bonds 
2;^.  Cash  Allowances 


Changes  in  the  Work 

Claims  for  Extras 

Applications  for  Payments 

Certificates  and  Payments 

Payments  Withheld 

Liens 

Permits  and  Regulations 

Royalties  and  Patents 

Use  of  Premises 

Cleaning  Up 

Cutting,  Patching,  and  Digging 

Delays 

36.  Owner's  Right  to  Do  Work 

37.  Owner's   Right   to   Terminate 

Contract 

Contractor's    Right    to    Stop 
Work  or  Terminate  Contract 

Damages 

Mutual  Responsibility  of  Con- 
tractors 

Separate  Contracts 

Assignment 

Subcontracts 

Relations   of    Contractor  and 
Subcontractor 
45.  Arbitration 


24. 

25- 

26. 
27. 
28. 
29. 
30. 
31- 
32. 
33- 
34- 
35- 


38. 

39- 
40. 

41. 
42. 

43- 
44. 


CONTRACTORS'  ACCOUNTS  323 

The  development  of  the  standard  documents  commenced  in 
1887,  when  the  Institute  of  Architects  and  the  National  Associa- 
tion of  Builders  undertook  the  preparation  of  a  uniform  contract 
satisfactory  to  the  members  of  both  organizations.  From  time  to 
time  revisions  have  been  authorized  in  order  to  meet  the  changing 
conditions  in  the  building  trades.  The  documents,  although 
intended  for  use  in  actual  practice,  are  also  regarded  as  a  code  of 
reference  representing  the  judgment  of  the  Institute  as  to  what 
constitutes  good  practice.  They  have  been  approved  by  the 
national  industrial  organizations  which  comprise  the  building 
trades. ' 

Organization  of  the  Business 

In  order  that  a  contractor's  engagements  may  be  successfully 
initiated  and  carried  to  a  profitable  termination,  it  is  of  prime 
importance  that  he  surround  himself  with  an  organization  not 
only  aggressive  in  its  quest  for  work  and  successful  in  bidding 
for  it,  but  also  departmentized  and  co-ordinated  to  produce 
continuity  of  operations  on  a  piece  of  work  from  commencement 
to  completion.  Form  i  shows  a  typical  form  of  organization  for  a 
general  contracting  business. 

Administration  Department 

In  addition  to  performing  the  customary  administrative  func- 
tions, there  devolves  upon  the  administration  department  the 
work  of  submitting  the  final  bid,  the  preparation  of  contracts  and 
their  signing,  the  execution  of  all  necessary  bonds,  the  mainte- 
nance of  adequate  insurance,  and  the  financing  of  all  operations. 
It  maintains  also  a  constant  contact  with  all  other  departments 
and  with  subcontractors,  and,  through  the  close  observation  of 
progress  charts,  contract  cost  records,  and  general  financial  re- 
ports, its  executives  are  enabled  to  keep  informed  of  current 
operations,  so  that  variations  from  original  estimates  may  be 


»  The  documents  are  published  and  sold  by  the  American  Institute  of  Architects,  The 
Octagon,  Washington,  D.  C. 


324 


ACCOUNTING— THEORY  AND  PRACTICE 


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CONTRACTORS'  ACCOUNTS  325 

noted,  investigated,  and  remedied  in  time  to  prevent  serious  loss 
in  case  the  cost  greatly  exceeds  the  estimate. 

New  Business  Department 

The  number  and  magnitude  of  building  operations  in  modern 
times  compel  the  contractor  to  maintain  a  staff  whose  duties  are 
to  keep  in  touch  with  architects  and  prospective  builders,  to 
follow  up  trade  reports  of  contemplated  construction  work,  and 
in  general  to  be  on  the  alert  for  leads  which  may  result  in  signed 
contracts.  It  is  also  one  of  the  functions  of  this  department  to 
adjust  all  differences  which  may  arise  from  time  to  time  between 
the  architects  and  the  contractor,  in  order  that  the  latter  may  be 
favorably  remembered  when  requests  for  bids  are  issued. 

Estimating  Department 

The  invitation  to  bid  is  accompanied  by  copies  of  the  plans 
and  specifications  of  the  proposed  structure.  These  documents 
are  carefully  studied  by  a  corps  of  estimaters  conversant  with 
previous  experience  under  similar  conditions,  trained  in  the 
purchase  of  materials  and  supplies,  and  versed  in  all  matters 
pertaining  to  the  fluctuations  of  labor  supply  and  cost.  Sub- 
contractors satisfactory  to  the  architect  are  asked  to  tender 
bids  to  this  department  for  the  subdivisions  of  the  work  which 
the  general  contractor  does  not  elect  to  perform  himself.  When 
all  material,  labor,  and  burden  figures  have  been  computed,  the 
administration  department  usually  supplies  an  arbitrary  amount 
for  profit  to  be  added,  and  the  total  constitutes  the  entire  bid, 
which  is  transmitted  to  the  architect.  In  case  the  bid  is  success- 
ful, copies  of  the  estimate  are  furnished  to  the  chief  engineer  and 
the  general  superintendent,  in  order  that  they  may  be  able  at  all 
times  to  compare  the  cost  of  the  results  achieved  with  the  stand- 
ards set  in  the  estimate.  The  purchasing  departm^ent  is  pro- 
vided with  the  materials  section  of  the  estimate,  so  that  it  may 
compare  the  prices  actually  paid  with  those  used  by  the  estimat- 
ers and  arrange  deliveries  to  meet  demands. 


326  ACCOUNTING— THEORY  AND  PRACTICE 

Accounting  Department 

To  the  accounting  branch  of  the  contractor's  organization  is 
assigned  the  installation  and  maintenance  of  all  accounts  and 
records  necessary  for  the  proper  control  of  construction  and 
financial  operations.  All  purchases,  requisitions  for  payments  on 
account  of  completed  work,  and  all  cash  receipts  and  disburse- 
ments are  reported  to  this  division  by  means  of  proper  forms. 
Separate  accounts  are  kept  for  the  cost  of  each  contract,  sub- 
divided into  several  sections  when  required.  This  department 
acts  also  in  an  auditing  capacity  in  reviewing  pay-rolls  and  mate- 
rial invoices  for  all  of  the  engagements  in  progress.  It  also  pre- 
pares periodical  financial  statements,  supported  by  detailed 
schedules  of  all  important  items  for  the  information  of  the  execu- 
tives of  the  concern. 

Purchasing  Department 

It  is  the  duty  of  the  purchasing  agent  to  keep  himself  and  his 
staff  informed  on  all  conditions  affecting  the  purchases  of  materials 
and  supplies.  To  this  end  he  m.aintains  files  containing  current 
information  and  offerings  of  commodities  used  in  construction 
work.  The  routine  of  his  department  is  very  much  the  same 
as  in  a  similar  branch  of  a  manufacturing  concern. 

Construction  Department 

In  the  last  analysis  the  construction  department  is  the  one 
on  which  rests  the  responsibihty  for  the  successful  consummation 
of  construction  engagements.  The  chief  engineer  of  the  firm  is  in 
command  of  all  employees  prosecuting  the  work,  and  is  assisted 
by  a  corps  of  assistant  engineers  and  draftsmen  and  a  general 
superintendent.  The  general  superintendent  in  turn  looks  to  the 
various  job  superintendents  for  the  proper  progress  of  the  con- 
tracts assigned  to  them.  Careful  consideration  is  given  to  each 
subdivision  of  the  contract;  distribution  of  plant  (machinery), 
materials,  and  labor  are  planned  in  advance,  and  arrangements 
are  effected  for  such  co-ordination  of  effort  as  will  result  in  unin- 


CONTRACTORS'  ACCOUNTS  327 

terrupted  progress.  As  work  reaches  the  "requisition  for  pay- 
ment" stage,  the  chief  engineer  is  notified.  Either  he  or  a  desig- 
nated representative  who  has  had  no  direct  contact  with  the  work 
inspects  it,  and  if  everything  has  been  properly  done,  the  account- 
ing department  is  notified  to  prepare  the  requisition  for  the  archi- 
tect's approval. 

II.     Accounting  Procedure 

Record  of  Signed  Contract 

In  outUning  the  accounting  procedure  in  the  contracting  busi- 
ness, it  will  be  the  purpose  to  present  and  describe  only  such  forms 
as  are  peculiar  to  the  building  trades  contracting  business,  and  to 
omit  the  other  necessary  forms  not  differing  materially  from  those 
customarily  used  in  cost  or  general  accounting. 

As  soon  as  the  signed  contract  has  been  returned  to  the  con- 
tractor's office,  it  is  given  a  contract  number  and  a  job  record  card 
(Form  2)  is  prepared  therefrom  in  triplicate.  This  is  a  formal 
memorandum  containing  descriptive  data  only,  and  is  intended  to 


Job 

Date. 192_ 


Description  = 


lob  Started 

192 

Job  Approved 

192 

Bv 

Job  Finished J  92. 


Form  2.     Job  Record  Card 


furnish  at  any  time  a  ready  record  of  the  work  in  process  of  com- 
pletion or  to  be  started  in  the  future.    The  original  is  sent  with  the 


328  ACCOUNTING— THEORY  AND  PRACTICE 

plans  and  specifications  of  the  job  to  the  superintendent  in  order 
that  he  may  prepare  for  the  work  as  soon  as  practicable.  The 
duplicate  is  forwarded  to  the  accounting  department,  where  it 
serves  as  the  basis  for  the  opening  of  two  accounts,  one  with  the 
owner  in  the  accounts  receivable  (owners)  ledger,  and  the  other 
with  the  contract  in  the  contract  cost  ledger.  The  triplicate  is 
retained  for  reference  by  the  contract  department. 

Purchasing 

Upon  receipt  of  the  materials  section  of  the  estimate,  the  pur- 
chasing agent  proceeds  to  order  and  cause  to  be  shipped  to  the 
construction  point  the  required  materials  and  supplies.  Many 
contracts  require  certain  grades,  sizes,  and  carvings  of  stone, 
structural  steel,  and  other  special  materials,  and  these  must  be 
ordered  for  delivery  in  advance  of  the  date  required  by  the  job 
superintendent.  Some  freight  bills  and  purchases  of  an  emer- 
gency nature  are  made  and  paid  for  by  the  field  ofl&ce  upon  the 
authority  of  the  job  superintendent  from  the  imprest  fund  main- 
tained for  these  purposes.  Properly  approved  vouchers  for  all 
such  pajrments  are  sent  with  the  periodical  report  to  the  general 
office  when  reimbursement  is  requested. 

Storing 

It  is  customary  for  large  contracting  firms  to  maintain  at 
convenient  points  storeyards  or  warehouses,  in  which  are  carried 
quantities  of  tools,  equipment,  and  materials,  which  are  standard, 
being  used  on  nearly  every  piece  of  work  undertaken.  Stores 
ledgers  properly  classified  are  operated  at  the  storage  points  to 
account  for  the  materials  consigned  to  them.  These  ledgers  are 
controlled  by  records  kept  at  the  main  office.  In  the  case  of 
materials  shipped  direct  to  a  job,  it  is  customary  to  charge  them 
to  the  contract  in  question  instead  of  passing  them  through  the 
stores  accounts.  The  forms  used  in  coimection  with  the  purchase, 
storage,  and  issuance  of  tools,  equipment,  and  materials  are 
similar  to  those  used  in  other  lines  of  business  to  check  stores,  and 


CONTRACTORS'  ACCOUNTS  329 

consist  of  the  usual  purchase  orders,  invoices,  bills  of  lading, 
receiving  records,  stores  ledgers,  requisitions,  reports  of  materials 
issued  or  transferred,  delivery  receipts,  etc. 

Transfer  of  Materials 

Materials  to  be  used  on  all  subdivisions  of  the  contract  should 
be  requisitioned  on  the  usual  forms.  It  often  happens  that  in  an 
emergency  it  becomes  necessary  to  obtain  materials  from  another 
contract  in  progress  in  the  vicinity,  or  to  transfer  items  from  one 
storage  point  to  another.  For  these  purposes,  and  also  for  trans- 
ferring unused  materials  on  the  completion  of  a  piece  of  work,  a 
"  transfer  of  materials  "  blank  is  used.  This  takes  the  form  of  a 
journal  voucher,  and  provides  for  the  debiting  and  crediting  of 
the  contracts  or  storage  yards  affected,  and  also  shows  in  detail 
the  materials  transferred. 

Timekeeping  and  Pay- Roll 

A  timekeeper  is  assigned  to  each  contract,  his  duty  being  to 
keep  an  accurate  record  of  each  employee.  As  soon  as  an  appli- 
cant has  been  engaged,  the  timekeeper  prepares  a  card  containing 
the  workman's  name  and  number,  class  of  labor,  the  date  on 
which  he  commences  work,  rate  of  pay,  etc.,  and  furnishes  him 
with  a  numbered  identification  brass  check  or  card,  preferably 
waterproof.  The  work  record  of  each  employee  is  kept  on  a  daily 
time  book  or  sheet,  a  recapitulation  of  which  is  made  at  the  end 
of  each  week  on  a  weekly  pay-roll  form,  prepared  in  dupHcate, 
which  after  approval  by  the  job  superintendent  is  used  by  the 
paymaster.  Wages  are  usually  paid  on  Saturday  for  the  week 
ending  the  preceding  Thursday  evening.  A  pay-roll  fund  is 
maintained  at  each  construction  point  for  the  purpose  of  paying 
off  workmen  who  leave  or  are  dismissed  between  regular  pay 
days.  The  amount  of  the  fund  is  governed  by  the  extent  of  the 
construction  work  in  progress.  The  weekly  pay-roll  is  summar- 
ized as  to  distribution  according  to  the  contracts  affected,  and 
this  distribution  sheet,  together  with  the  original  copy  of  the 


330  ACCOUNTING— THEORY  AND  PRACTICE 

weekly  pay-roll,  is  vouchered  and  follows  the  course  of  an  ordi- 
nary purchase  voucher.  In  an  endeavor  to  protect  themselves 
from  workmen  who  may  claim  that  they  have  not  been  paid, 
some  contractors  require  each  employee  to  sign  a  receipt  for  his 
salary  or  weekly  pay.  Where  foreign  laborers,  unable  to  write  the 
English  language,  are  employed,  their  receipts  are  sometimes 
taken  on  the  pay-roll  by  means  of  the  Bertillon  system  of  finger- 
printing. Under  another  method  the  identification  check  used 
when  paying  off  is  taken  up  and  another  is  issued  when  the 
employee  resumes  work. 

Equipment — Control  and  Depreciation 

The  mechanical  aids  used  on  each  contract  vary  from  small 
hand  tools  to  large  single  machines,  such  as  steam  shovels,  hoist- 
ing machines,  pile-drivers,  cranes,  derricks,  dredges,  construction 
locomotives,  rolling  stock,  etc.  In  order  that  the  general  office 
may  know  at  all  times  the  location  of  such  equipment,  it  is  de- 
sirable that  a  record  of  each  item  be  kept.  For  this  purpose  a 
subsidiary  equipment  ledger  is  used,  and  an  account  opened  for 
each  large  piece  of  machinery  and  group  accounts  for  the  smaller 
pieces.  This  record  contains  the  usual  details,  viz.,  the  descrip- 
tion of  the  equipment,  the  vendor's  name,  the  date  purchased, 
and  the  cost.  Practice  in  this  regard  is  fairly  uniform  among 
contractors,  but  there  is  some  variance  in  the  manner  of  following 
the  transfers  of  equipment  and  charging  for  its  use.  All  contrac- 
tors will  grant  that  depreciation  of  equipment  constitutes  an 
essential  element  in  the  cost  of  a  contract.  Some  contractors 
prefer  to  open  a  temporary  contract  plant  account  for  each  piece 
of  work,  and  to  transfer  to  this  account  all  items  of  equipment  to 
be  used  thereon  at  the  value  at  which  they  are  carried  in  the  main 
equipment  ledger.  At  the  time  of  the  retransfer  of  such  equip- 
ment, during  the  progress  of  the  work  or  at  its  completion,  an 
inventory  and  appraisal  are  made,  and  an  amount  representing 
the  difference  between  its  original  transfer  value  and  its  retrans- 
fer \  alue  is  charged  to  the  cost  of  the  work  as  depreciation  of 


CONTRACTORS'  ACCOUNTS  331 

equipment.  Repairs  and  maintenance  expenses  during  its  use 
are  charged  to  the  cost  of  the  contract  affected.  Under  another 
method  no  actual  transfer  of  equipment  is  made  on  the  books,  but 
notations  are  made  on  each  ledger  sheet  showing  the  location  of 
the  items.  In  this  case  depreciation  is  charged  at  a  fixed  rate  and 
for  the  time  the  machine  is  used  on  a  particular  contract.  Under 
still  another  plan  a  daily  depreciation  rate  is  set,  based  on  past 
experience  for  the  use  of  each  piece  of  equipment.  The  affected 
contract  is  charged  for  the  time  the  machinery  has  been  allocated 
to  it. 

As  a  general  rule  the  various  foremen  are  held  accountable  for 
the  small  hand  tools.  In  order  to  minimize  losses  due  to  careless- 
ness and  theft,  it  is  customary  to  take  frequent  physical  inven- 
tories of  such  items.  Upon  the  completion  of  each  subdivision  of 
the  contract  a  final  inventory  is  always  taken,  and  all  differences 
resulting  between  the  amounts  charged  to  the  jobs  on  this  ac- 
count and  the  inventory  values  are  included  in  the  cost  of  the 
work.  Although  it  is  not  advisable  to  depreciate  machinery  and 
equipment  in  use  at  the  close  of  a  fiscal  year  if  no  profit  or  loss  is 
to  be  taken  on  a  contract,  yet  if  such  an  estimate  is  to  be  made  on 
a  partly  completed  piece  of  work,  it  will,  of  course,  be  necessary 
to  consider  depreciation  for  the  elapsed  time. 

Burden 

Burden,  or  overhead  expense,  in  contractors'  accounts  is 
limited  to  such  general  expenses,  including  administrative,  as 
caimot  be  charged  direct  to  any  particular  contract.  There  are 
several  methods  of  treating  burden.  Some  contractors  distribute 
it  on  a  labor-hour  basis;  others  on  a  basis  of  material  and  labor 
cost  of  work  done  during  a  specified  period.  Those  who  do  not 
attempt  a  scientific  method  distribute  overhead  in  an  arbitrary 
manner,  allocating  the  amounts  according  to  the  possible  profit 
expected  to  accrue.  The  second  method  mentioned  is  the  sim- 
plest of  computation.  The  cost  of  each  contract  during  the  speci- 
fied period  is  obtained  from  the  Contract  Cost  ledger  account  by 


332 


ACCOUNTING— THEORY  AND  PRACTICE 


deducting  the  cost  at  begiiming  of  the  specified  period  from  its 
cost  at  the  close  of  the  period,  and  the  costs  of  all  contracts 
are  aggregated.  The  overhead  expenses  are  then  determined, 
and  each  contract  is  charged  with  the  proportion  of  the  overhead 
expense  that  its  cost  bears  to  the  total  cost  of  work  performed  on 
all  contracts  for  the  period. 

Recording  Costs 

A  combination  voucher  register  and  journal  (Form  3)  is  used 
in  which  are  entered  vouchers  representing  not  only  the  usual  items 
of  purchases  of  materials,  pay-rolls,  and  expenses,  but  also  transfers 
of  equipment  and  materials,  charges  and  credits  of  subcontractors 
and  owners,  credits  to  work  in  progress,  and  other  transfer  entries. 


Dr. 

Miscellaneous 

Accounts 
Receivable 

Amount 
Requisitioned 

Contract  Cost 
Ledger 

Material 

Accounts       / 
Payable        \ 

Description 

Amount 

~^ 

■ — . " ' — 

'         ■ J ' 

Forms.     Voucher 

A  job  distribution  summary  is  unnecessary,  as  the  amounts  are 
entered  in  total  in  the  Contract  Cost  Ledger  column,  and  the 
details  of  these  entries  are  posted  direct  from  the  vouchers  to  the 
affected  job  account  in  the  contract  cost  ledger,black  ink  beingused 
for  all  debit  entries  and  red  ink  for  all  credit  and  closing  entries. 

The  contract  cost  ledger  (Form  4)  is  used  to  enable  the  con- 
tractor to  maintain  control  of  all  operations  under  each  contract, 
and  to  know  at  all  times  the  exact  cost  to  date  of  each  subdivision 
of  the  contract.  By  comparison  with  the  estimated  cost  of  each 
subdivision,  as  indicated  in  the  statistical  information  entered 
a  t  the  top  of  each  page,  the  contractor  or  his  superintendent  can 


CONTRACTORS'  ACCOUNTS 


333 


discover  and  correct  deviations  in  actual  cost  of  construction 
from  the  original  estimate,  or  ascertain  their  cause.  In  order  to 
avoid  confusion  and  to  simplify  the  preparation  of  requisitions, 
it  is  customary  to  use  a  separate  ledger  sheet  for  extras.  When  a 
requisition  for  a  payment  on  account  of  work  completed  or  in 
progress  has  been  entered  in  the  voucher  register,  the  credit  side 
of  the  voucher  is  posted  to  the  affected  job  account  in  the  con- 
tract cost  ledger  in  the  column.  Amount  Requisitioned.  The 
total  of  these  items  is  credited  at  the  close  of  each  month  from  the 
Amount  Requisitioned  column  in  the  voucher  register  to  the 
Amount  Requisitioned  account  in  the  general  ledger. 

When  a  section  of  a  contract  is  completed  and  is  accepted  by 
the  architect  for  the  owner,  a  requisition  is  passed  for  the  final 


Cr. 

Voucher 
No. 

Accounts 
Payable 

Material 

Contract 
Ledger 

/(mount 
equlsitione( 

Miscellaneous 

Date 

Description 

Amount 

] J 

i . 



_^ 



_ 



Register  and  Journal 

payment  on  that  particular  subdivision.  Should  it  be  desired  to 
show  a  profit  or  loss  on  such  completed  work,  the  actual  cost  of 
each  subdivision  and  the  total  of  the  amounts  requisitioned  there- 
for may  be  transferred  by  a  journal  entry  debiting  the  Cost  of 
Contracts  account  with  the  cost  and  crediting  the  Contract  Sales 
account  with  the  total  amount  requisitioned.  The  contract  cost 
ledger  is  so  drafted  as  to  admit  of  the  transfer  of  subdivisional 
profits  or  losses,  or  to  allow  the  account  to  continue  until  the 
completion  of  the  entire  contract,  at  which  time  profits  or  losses 
can  be  shown  on  each  subdivision  and  upon  the  total  contract. 
In  closing  the  books  for  statement  purposes  at  any  time,  the 


334 


ACCOUNTING—THEORY  AND  PRACTICE 


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CONTRACTORS'  ACCOUNTS  335 

trial  balance  of  the  contract  cost  ledger  should  be  prepared  in  two 
columns,  i.e.,  Total  Cost  of  Work,  and  Amount  Requisitioned. 
The  total  cost  of  work  at  the  closing  date  represents  an  inventory 
item  on  contracts  under  construction,  and  should  agree  with  the 
balance  of  the  Contract  Cost  Ledger  controlling  account  in  the 
general  ledger.  The  amount  requisitioned  represents  the  aggre- 
gate of  the  sums  to  which  the  contractor  is  entitled  on  account  of 
work  performed  and  which  he  presumably  has  received  according 
to  the  terms  of  the  contract.  This  total  should  agree  with  the 
balance  of  the  Amount  Requisitioned  account  in  the  general 
ledger.  The  inventory  item  or  total  cost,  would  appear  on  the 
balance  sheet  as  an  asset;  the  amount  requisitioned  on  uncom- 
pleted work  would  be  treated  as  a  liability,  in  the  same  manner 
as  any  advance  received  against  future  delivery.  If  profits  have 
been  taken  upon  the  completion  of  any  subdivisions  of  any  con- 
tracts, the  total  amount  of  such  classification  columns  will  have 
been  deducted,  as  previously  outlined,  from  the  total  cost  before 
treating  the  latter  as  an  asset,  and  the  amounts  requisitioned,  on 
account  of  such  classification,  will  have  been  deducted  from  the 
liability  item.  Amount  Requisitioned.  The  balance  sheet,  in 
these  instances,  then  shows  as  an  inventory  of  work  in  progress 
only  such  work  as  is  actually  under  construction  and  on  which  no 
profit  has  been  taken,  while  the  liability  item,  Amount  Requisi- 
tioned, includes  only  payments  received  on  account  of  uncom- 
pleted work.  Many  building  contracting  firms  prefer  not  to  close 
a  job  account  in  the  contract  cost  ledger  until  sufiicient  time  has 
elapsed  subsequent  to  the  completion  of  all  work  to  render  im- 
probable any  additional  charges  for  repairs,  claims,  etc. 

Subcontractors  Ledger 

Building  operations,  as  they  are  conducted  today,  are  per- 
formed by  general  contractors  and  subcontractors.    In  the  case 
of  the  general  contractor  the  entire  contract  is  awarded  to  him,  > 
and  he  assumes  the  responsibility  for  the  proper  completion  of  all 
the  work.    He,  however,  sublets  the  parts  of  the  work  which  he 


336 


ACCOUNTING— THEORY  AND  PRACTICE 


does  not  care  to  perform  himself,  to  specialists  in  their  particular 
fields,  who  are  able  to  do  their  work  more  skilfully,  more  eco- 
nomically, and  more  rapidly  than  he  himself.  No  contractual 
relation  is  created  between  any  subcontractor  and  the  owner,  but 
the  general  contractor  is  obliged  to  notify  the  architect,  in  writing, 
of  the  names  of  the  subcontractors  proposed  for  the  principal 
parts  of  the  work,  and  the  general  contractor  is  not  permitted  to 
employ  any  subcontractor  disapproved  as  incompetent  by  the 
architect.  The  general  contractor  is  as  fully  responsible  to  the 
owner  for  the  acts  and  omissions  of  his  subcontractors  and  of 
persons  directly  and  indirectly  employed  by  them,  as  he  is  for 
the  acts  and  omissions  of  persons  directly  employed  by  him.  The 
general  contractor  agrees  to  bind  every  subcontractor  by  the 
terms  of  the  general  conditions,  drawings,  and  specifications,  as 
far  as  they  are  applicable  to  his  work.  The  general  contractor  and 
each  subcontractor  are  bound  to  each  other  by  formal  contract 
in  the  same  manner  as  the  general  contractor  and  the  owner  are. 

The  subcontractor's  system  of  accounts  is  on  the  same  general 
plan  as  that  of  the  general  contractor.  The  general  contractor 
becomes  the  principal  and  the  subcontractor  looks  to  him  for 
reimbursement.    Requisitions  for  payment  are  prepared  and  sent 


Sub-Contractor 

~ 

1 

Address 
Terms 

Penalty 

Must  be  completed  bv 

Amount  ef  ■^m.-Confart 

Toml 

) 

» 

t 

t 

i 

t 

1 

$ 

1 

( 

Dr. 

Cr. 

CoDt   No. 

Con' I  No. 

Coo- 1  No. 

Co»'l  N^ 

Co'i  No. 

Ci«'l  No. 

Coo' I  No. 

Con' 1  No. 

Coo't  No. 

Coo't  No. 

' 

L 

_ 

u 

^ 

_ 

_ 

. 

_ 

Form  5.    Subcontractors  Ledger 


to  the  general  contractor  in  accordance  with  the  terms  of  the 
contract.  These  requisitions  are  entered  by  the  general  contrac- 
tor through  the  voucher  register  and  journal  as  a  debit  to  the 


CONTRACTORS'  ACCOUNTS 


337 


contract  on  which  the  work  has  been  performed  and  a  credit  to 
accounts  payable;  the  detail  credit  appears  in  the  individual's 
account  in  the  subcontractors  section  of  the  accounts  payable 
ledger  and  is  there  extended  also  into  the  column  allotted  to  the 
particular  contract. 

It  often  happens  that  a  general  contractor  uses  a  subcontrac- 
tor on  several  pieces  of  construction  work.  The  subcontractors 
ledger  (Form  5)  has  been  planned  to  condense  as  much  as  possible 
the  bookkeeping  connected  with  this  feature  of  the  business,  and 
yet  to  show  on  one  sheet  the  status  of  each  subcontract,  the 
amount  paid  on  the  separate  subcontracts,  and  the  position  of  the 
subcontractor's  account  in  total. 


Requisitions  for  Payment 

As  the  work  progresses,  the  contractor  is  entitled  to  payments 
in  accordance  with  the  terms  of  the  contract.  Whenever  this 
point  is  reached,  the  contractor  prepares  a  request  for  payment, 
called  a  requisition  (Form  6),  and  submits  it  to  the  architect. 
If  after  inspection  the  work  described  in  the  requisition  is  ac- 


APPLiCATION  FOR  CERTIFICATE  FOR  PAYMENT  ON  ACCOUNT  OF  CONTRACT 


Pol 
To_ 


By- 


Remarks 


Date- 


Approved- 


Form  6.     Requisition  for  Payment 


VOL.  Ill — 22 


338  ACCOUNTING— THEORY  AND  PRACTICE 

cepted  by  the  architect,  he  approves  and  returns  it  to  the  contrac- 
tor.   It  is  then  presented  to  the  owner  for  payment. 

Requisition  Register 

To  provide  the  executives  of  the  contractor's  staff  with  a 
means  of  ready  reference  in  connection  with  the  outstanding  re- 
quisitions, a  memorandum  record  (Form  7)  is  provided  in  which 


REOUISiTION  FOR  PAYMENT  REGISTER 

Contract 

January 

February 

March 

April 

May            1 

Req. 

Date  Paid 

Req. 

Date  Paid 

Req. 

Date  Paid 

Req. 

Date  Paid 

Req. 

Date  Paid 

^ — ^ 

_ 

u 

^__ 

— — ~ ' — ' — 

-       ^ — 

— 

■ 

■~- 



— 1 

1 1 

Form  7.     Requisition  for  Payment  Register 

all  requisitions  issued  and  payments  thereon  are  entered.  This 
form  will  show  at  all  times  the  total  amount  requisitioned  and 
paid  on  all  contracts  to  date. 

Architect's  Certificate 

Some  architects  prefer  to  retain  the  contractor's  requisition 
and  issue  their  own  certificates  authorizing  payment  by  the  owner. 
These  certificates  (Form  8)  are  prepared  in  duplicate;  the  original 
is  sent  by  the  architect  to  the  contractor  who  presents  it  to  the 
owner  for  payment,  the  carbon  copy  is  retained  for  reference  by 
the  architect. 

Recording  Income 

In  the  voucher  register  and  journal,  previously  described, 
provision  is  made  for  entering  charges  to  owners.  Approved 
requisitions  form  the  bases  for  the  debits  to  the  owners'  accounts, 
the  corresponding  credits  being  to  the  Amount  Requisitioned 
account  in  the  general  ledger,  the  details  of  which  are  posted  for 
readily  available  statistical  purposes  in  an  appropriate  section  in 


CONTRACTORS'  ACCOUNTS 


339 


the  afifected  job  accounts  of  the  contract  cost  ledger.  On  the 
completion  of  a  fiat-sum  contract,  or  at  such  tune  as  a  profit  may 
conservatively  be  taken  on  a  cost-plus  piece  of  work,  a  journal 
entry  is  made,  transferring  the  cost  of  the  work  from  the  contract 


Certificate  No Building  No . 


To 

This  will  certify  that  under  the  terms  of  the  contract 

for  work  upon 

M 

Contractor  for is  entitled  to  the . 

Payment  amounting  to 


. . . 192. . 
.  .Owner 


Dollars 


Amount  of  contract 
Additional  contracts 
Extra  work 


Total 

Amount  of  ttiis  certificate  $ . 
Previously  paid 

Total  to  date 

Balance 


Architect 


$ 

Received  from 

As  per  above  certificate 


.    192.. 
Dollars 


Form  8.     Architect's  Certificate 

cost  ledger  to  the  general  ledger  Cost  of  Contracts  account;  at 
the  same  time  the  total  amount  requisitioned  on  the  contract  is 
transferred  from  the  Amount  Requisitioned  account  to  the  Con- 
tract Sales  account.  At  the  close  of  each  period  the  Cost  of 
Contracts  and  the  Contract  Sales  accounts,  together  with  all 


340  ACCOUNTING— THEORY  AND  PRACTICE 

open  undistributed  nominal  accounts,  are  closed  out  to  the  Profit 
and  Loss  account  in  the  usual  manner. 

The  Cash  Records 

The  recording  of  the  cash  receipts  and  disbursements  presents 
no  unusual  difficulties.  The  ordinary  cash  book  columnized  to 
provide  for  the  control  accounts  required  suffices.  Separate 
imprest  funds  for  petty  disbursements  and  pay-roll  requirements 
are  advisable  for  the  main  office  and  each  field  office. 

The  Accounts  Receivable  Ledger 

The  accounts  receivable  (owners)  ledger  (Form  9)  is  intended 
to  show  at  a  glance  the  total  amount  of  the  contract  and  the 
proportion  allotted  to  each  subdivision,  the  amount  due  from  each 
owner,  the  amount  requisitioned  on  each  subdivision  of  the  con- 
tract, and  the  amoimt  to  be  requisitioned. 

The  owner's  account  is  opened  from  statistical  information 
contained  in  the  job  record  card  and  the  original  estimate.  Many 
contractors  have  been  accustomed  to  charge  the  owner's  account 
with  the  entire  amount  of  the  contract  at  the  time  of  signing, 
making  the  corresponding  credit  to  an  account  called  "Con- 
tracts." Owing  to  the  fictitious  and  changing  natures  of  the 
asset  and  liability  items,  which  might  include  a  number  of  these 
accounts,  an  attempt  has  been  made  in  the  form  shown  to  recon- 
cile the  prejudices  of  old  contracting  practice  with  modern  ac- 
counting methods,  which  permit  of  the  preparation  of  a  more 
accurate  balance  sheet  than  was  possible  under  the  older  method, 
and  which  also  furnish  more  information  to  the  contractor  than 
he  previously  obtained. 

The  approved  requisitions  form  the  bases  for  the  debits  to  the 
owner's  account,  and  reach  there  through  the  medium  of  the 
voucher  register  and  journal,  in  which  an  entry  is  made  debiting 
the  owner's  accoimt  and  crediting  the  Amount  Requisitioned 
column  of  the  affected  job  account  in  the  contract  ledger.  The 
owner's  ledger  account  provides  for  the  distribution  of  the  re- 


CONTRACTORS'  ACCOUNTS 


341 


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342  ACCOUNTING— THEORY  AND  PRACTICE 

quisition  to  enable  the  contractor  to  compare  the  total  of  the 
requisitions  of  any  subdivision  of  the  contract  with  the  contract 
price  of  that  section  as  indicated  in  the  statistical  record  at  the 
top  of  the  page.  When  the  owner  remits  for  the  amount  of 
the  requisition,  his  account  is  credited  from  the  cash  book  in  the 
usual  manner.  Any  debit  balance  remaining  in  the  owner's 
account  constitutes  a  true  asset,  and  is  so  treated  in  the  balance 
sheet. 

Profits  on  Contracts 

The  matter  of  profits  on  uncompleted  contracts  at  the  end  of 
a  fiscal  period  is  one  in  which  the  accountant  should  take  the 
most  conservative  attitude,  and  to  this  end  it  is  believed  to  be 
usually  unwise  to  attempt  to  place  an  estimate  on  the  amount 
earned  on  the  portion  completed.  There  is  much  to  be  said  on 
both  sides  of  the  question,  and  it  does  seem  as  though  the  periods 
which  bear  the  burden  of  the  construction  work  should  profit 
accordingly;  but  in  work  of  this  character  there  are  so  many  haz- 
ards, such  as  additional  repairs,  claims,  labor  troubles,  etc.,  that 
it  seems  better  to  defer  the  computation  of  profit  until  the  work 
is  completed.  In  the  case  of  flat-sum  contracts,  where  it  was 
formerly  customary  to  enter  a  charge  against  the  owner  for  the 
entire  amount  of  the  contract  at  the  time  of  signing,  and  to  credit 
Contracts  with  a  similar  amount,  all  costs  incurred  during  the 
period  were  charged  against  Contracts,  and  at  the  close  of  each 
period  an  amount  estimated  to  be  required  to  complete  the  work 
in  hand  was  debited  to  the  Cost  of  Contracts  and  carried  into  the 
new  period  as  a  liability.  The  effect  of  such  entries  was  that  the 
entire  profit  expected  to  accrue  on  a  contract  was  credited  to  a 
I^criod  during  which  only  a  part  of  the  work  was  done.  This 
caused  the  succeeding  period  or  periods  to  complete  the  work 
without  being  credited  with  whatever  profit  was  earned,  and  to 
stand  whatever  loss  was  suffered. 

In  the  accounting  procedure  outlined  here,  provision  has  been 
made  for  the  inclusion  of  subdivisional  profits  on  flat-sum  con- 


CONTRACTORS'  ACCOUNTS  343 

tracts,  if  insisted  upon,  but  experience  and  the  practice  of  the 
more  representative  contracting  firms  require  that  they  be  de- 
ferred until  the  completion  of  the  work. 

In  the  case  of  cost-plus  contracts,  the  profit  may  properly 
be  considered  and  taken  into  the  accounts  as  soon  as  the  con- 
tractor renders  his  bill,  as  the  profit  has  been  then  definitely 
earned. 

Financing 

To  a  contractor  in  good  standing  the  financing  of  work  in 
hand  is  not  a  difficult  problem.  His  chief  concern  is  to  be  supplied 
with  funds  for  pay-roll  purposes.  Dealers  in  materials  are  accus- 
tomed to  wait,  and  will  not  press  the  contractor  for  pajrment 
until  the  work  has  progressed  to  a  point  where  they  are  certain  he 
has  been  reimbursed  for  their  particular  commodities.  Where  the 
engagement  is  one  of  considerable  magnitude,  the  initial  outlay 
in  moving  cumbersome  and  costly  equipment  to  the  site  and  set- 
ting it  up  for  use  is  heavy,  and  as  there  will  be  no  work  done  for 
some  time,  against  which  requisitions  for  payment  can  be  issued, 
the  funds  therefor  must  be  provided  by  the  contractor.  This  is 
done  out  of  his  own  capital,  or  by  borrowing.  If  his  credit  stand- 
ing is  satisfactory,  his  bank  will  accept  his  unsecured  note  or 
notes,  having  satisfied  itself  that  the  money  will  be  used  for  the 
purposes  indicated  at  the  time  of  application.  Municipalities 
and  large  builders  recognize  this  feature  of  a  contractor's  early 
outlays  and  permit  him  to  requisition  for  the  first  payment  before 
very  much  work  has  been  accomplished.  After  the  contract  is 
under  way,  the  payment  by  the  owner  of  approved  requisitions 
for  work  completed  should  enable  the  contractor  to  continue  the 
operations  under  the  contract  without  embarrassment. 

Conclusion 

Contractors'  accounts,  to  be  effective,  should  show  at  all 
times  the  cost  to  date  of  all  work  in  progress,  and  provide  the 
means  of  comparing  these  costs  with  the  estimated  costs  used  in 


344  ACCOUNTING— THEORY  AND  PRACTICE 

the  preparation  of  the  bid,  and  also  with  the  contract  price  of 
each  subdivision.  Information  should  always  be  available  as 
to  the  amounts  requisitioned.  Reference  to  the  owner's  account 
should  disclose  the  subdivisions  of  the  contract  which  have  been 
completed  and  for  which  requisitions  have  been  issued.  The  cost 
records  should  be  so  constructed  that  it  will  be  possible  to  deter- 
mine the  profit  or  loss  on  each  subdivision  of  the  contract,  whether 
or  not  it  is  decided  to  take  it  into  the  general  accounts.  The 
status  of  the  subcontractors'  accounts,  both  as  to  the  total 
amount  due  each  and  its  distribution  over  subcontracts,  where  the 
subcontractor  is  engaged  on  more  than  one  contract,  is  important, 
and  the  records  should  be  drawn  up  to  furnish  this  information. 
The  arrangement  of  accounts  in  the  general  ledger  should  be 
such  as  to  supply  readily  the  data  required  for  statements  of 
actual  assets  and  liabilities,  and  of  profit  and  loss. 


CHAPTER  X 

ACCOUNTING  IN  THE  COFFEE  TRADE 
By  Roy  B.  Kester 

Types  of  Distributers 

At  the  present  time  many  diverse  types  of  business  organiza- 
tions are  devoted  to  the  distribution  of  coffee,  among  which  the 
more  important  are:  the  green  coffee  man,  usually  a  broker  or 
importer,  who  deals  exclusively  in  the  green  berry;  the  roaster 
and  wholesaler,  who  buys  the  green  berry,  roasts  and  sells  it 
only  to  jobbers;  the  wholesales  grocer,  who  sells  a  line  of  product 
put  up  for  him  and  bearing  his  name,  or  who  does  his  own  roast- 
ing; the  coffee  and  tea  retail  merchant,  who  may  also  handle 
spices,  extracts,  baking  powder,  rice,  peanuts,  candies,  etc. ;  the 
chain  store;  and  the  perambulating  wagon  door-to-door  organiza- 
tion, which  may  have  its  own  roasting  plant.  In  a  given  business 
are  often  found  mixtures  of  many  of  these  features. 

It  is  the  purpose  of  this  chapter  to  discuss  the  more  salient 
accounting  features  and  problems  of  some  of  these  types  of  or- 
ganizations. No  attempt  is  made  to  develop  a  complete  system 
of  accounting  for  any  of  these  types,  only  so  much  being  given  in 
the  matter  of  forms  and  records  as  will  make  possible  a  ready 
understanding  of  the  problems  involved  and  the  method  of 
handling  them. 

The  main  divisions  of  the  discussion  of  the  subject  will  be  as 
follows : 

1.  Green  coffee,  its  importation  and  marketing. 

2.  Trading  in  futures  on  the  exchange. 

3.  Roasting  and  retailing. 

345 


346  ACCOUNTING— THEORY  AND  PRACTICE 

I.   Importation  and  Marketing  of  Green  Coffee 

Importing  Coffee 

For  a  proper  understanding  of  the  accounting  problems  in  the 
coffee  business  some  knowledge  of  the  methods  of  importation 
and  trading  are  necessary,  as  the  two  sources  from  which  a  supply 
can  be  drawn  are  the  foreign  and  the  domestic  markets. 

The  greater  part  of  the  coffee  consumed  in  this  country  comes 
from  Brazil  and  is  shipped  either  on  consignment  or  directly  to 
the  importer,  the  transaction  being  carried  on  through  the  foreign 
exporter's  domestic  agent.  In  the  case  of  Central  American  coffee 
brought  into  the  country,  the  importer  finances  the  grower  and 
extends  credit  to  the  planter  to  enable  him  to  raise  the  crop. 

When  the  exporter's  domestic  agent  has  received  an  inquiry 
from  an  importer,  he  cables  the  exporter,  stating  the  number  of 
bags  and  the  kind  of  coffee  wanted,  whether  the  price  to  be 
quoted  should  include  cost,  freight,  and  insurance,  or  cost  and 
freight  only,  and  also  the  medium  of  payment,  as  sterUng  or 
dollars.  The  exporter  gathers  such  information  as  will  enable 
him  to  offer  at  a  profit.  The  prevailing  replacement  price  of 
coffee  is  first  ascertained  regardless  of  the  price  paid  by  the  ex- 
porter for  the  stock  he  has  on  hand.  The  freight  is  then  added 
to  this  replacement  cost,  and  if  the  inquiry  is  C.  I.  F.  (cost,  in- 
surance, and  freight),  the  insurance  charge  is  included.  The 
rate  of  exchange  at  which  a  draft  can  be  sold  is  also  considered 
in  determining  the  price  the  American  buyer  should  be  quoted. 
The  exporter  always  quotes  his  offering  price  in  the  currency  of 
the  importer's  country,  although  he  may  demand  payment  in 
some  other  currency. 

Upon  the  receipt  of  the  exporter's  offer  the  importer,  if  the 
price  is  satisfactory,  cables  his  acceptance,  repeating  the  number 
of  bags,  the  description  of  the  coffee,  and  the  price.  He  also  gives 
his  name,  the  name  of  the  drawee  bank,  and  the  name  of  the 
American  bank  to  whom  the  documents  are  to  be  sent  should 
the  drawee  be  a  London  bank.    Previous  to  cabling,  the  importer 


ACCOUNTING  IN  THE  COFFEE  TRADE  347 

obtains  an  authorization  in  the  form  of  a  letter  of  credit,  per- 
mitting him  to  draw  on  the  London  bank. 

Shipment  and  Financing 

When  the  exporter  receives  the  cable  of  acceptance,  he  imme- 
diately engages  steamer  room  and  proceeds  to  fill  his  contract, 
which  must  be  performed  within  30  days,  unless  otherwise 
stipulated. 

Should  the  exporter  have  the  coffee  on  hand,  he  is  said  to  be 
"long  of  the  market";  but  if  he  must  go  out  and  buy,  he  is  said 
to  be  "short  of  the  market, "  and  must  cover  as  quickly  as  possible, 
which  will  be  at  a  profit  or  a  loss,  depending  upon  whether  the 
market  price  is  lower  or  higher  than  the  export  price  quoted. 

As  soon  as  the  steamship  agent  informs  the  exporter  that  the 
steamer  is  ready  for  its  cargo,  the  required  number  of  bags  are 
deposited  in  the  hold  of  the  ship  in  the  presence  of  the  exporter's 
shipping  clerk,  and  for  every  20  bags  of  coffee  placed  in  the  hold 
of  the  ship  a  receipt  in  the  form  of  a  card  is  given  the  clerk.  After 
all  the  coffee  has  been  transferred  to  the  vessel,  the  cards  are 
taken  by  the  exporter  and  exchanged  for  a  bill  of  lading,  to  which 
he  attaches  an  invoice,  and  his  draft  or  bill  of  exchange  drawn  on 
the  London  bank  specified  by  the  importer.  He  sells  the  draft, 
with  the  documents  attached,  to  his  local  bank  at  the  rate  of 
exchange  agreed  upon,  receiving  payment  in  his  country's  cur- 
rency. From  this  point  the  exporter  has  nothing  further  to  do 
with  the  transaction. 

The  bank  which  has  bought  the  draft  may  sell  it  to  the  local 
branch  of  the  London  bank.  This  branch  sends  the  bill  of  ex- 
change to  London,  with  documents  attached,  for  acceptance. 
After  acceptance  the  drawee  notifies  its  American  correspondent 
bank  of  the  fact  and  requests  that  payment  in  sterling  be  made  a 
certain  number  of  days  (usually  90  days)  after  the  date  of  accept- 
ance. Several  days  before  maturity  the  importer  buys  the  re- 
quired amount  of  sterling  bills  in  the  exchange  market  and  delivers 
them  to  the  American  bank  for  remittance  to  the  London  bank. 


348  ACCOUNTING— THEORY  AND  PRACTICE 

The  American  importer  cannot  secure  possession  of  the  docu- 
ments until  he  delivers  the  sterling  remittance,  unless  the  Ameri- 
can bank,  which  receives  the  documents,  is  willing  to  take  a  trust 
receipt,  by  means  of  which  the  importer  promises  to  pay  the 
original  draft  out  of  the  proceeds  of  the  sale  of  the  coffee,  title  to 
the  coffee  still  resting  with  the  correspondent.  When  the  coffee 
is  sold,  the  importer  takes  the  necessary  steps  to  pay  the  bill  of 
exchange,  as  described  above.  Should  the  credit  of  the  importer 
be  unsatisfactory,  the  American  bank  may  allow  him  to  take  the 
coffee  only  in  small  lots,  and  also  only  after  each  lot  has  been  sold 
and  paid  for.  Payment  of  the  draft  would  thus  be  made  in  in- 
stalments. 

Sterling  credits  were  the  most  common  form  of  financing  used 
by  American  importers  of  coffee  before  the  war.  Nowadays, 
however,  dollar  credits  are  preferred  because  of  the  violent  fluc- 
tuations in  the  rate  for  sterling  exchange.  The  drafts  under  these 
latter  credits  are  drawn  on  American  banks,  notably  New  York 
banks,  and  the  importers  are  not  obliged  to  buy  exchange  in 
reimbursing  the  drawee  banks  at  maturity,  since  the  drafts  are 
payable  in  dollars.  They  have  only  to  settle  with  checks  on  their 
own  banks. 

Costs  of  Handling  Green  Coffee 

The  first  cost  which  an  importer  has  to  m.eet  is  the  commission 
charged  by  the  bank  issuing  the  letter  of  credit.  In  case  of  ster- 
ling credits,  payment  has  to  be  made  in  London.  Drafts  are 
drawn  at  90  days'  sight,  and  if  remittance  reaches  London  before 
the  maturity  of  the  draft,  interest  is  allowed,  usually  at  a  rate  1% 
below  the  Bank  of  England  rate,  while  the  commission  charge 
depends  upon  the  number  of  days  payment  is  received  before  the 
draft  is  due.  The  following  commissions  are  customary:  when^ 
remittance  reaches  London  during  the  first  30  days  1/4%;  60 
days  3/8%;  at  date  of  maturity  1/2%,  the  regular  charge. 

The  second  item  of  cost  which  a  coffee  importer  has  to  bear 
is  that  of  marine  and  war  risk  insurance.    Coffee  shipped  from 


ACCOUNTING  IN  THE  COFFEE  TRADE  349 

foreign  ports  must  be  covered  by  marine  insurance,  and  in  time 
of  war  by  war  risk  insurance.  The  marine  insurance  charge 
amounts  to  25  cents  per  $100  of  value.  If  the  contract  includes 
the  payment  of  insurance  by  the  shipper,  the  cost  will  not,  of 
course,  include  this  charge,  but  such  contracts  are  not  usual. 

The  freight  charge  need  not  be  considered  in  estimating  the 
cost  of  coffee,  as  it  is  the  custom  for  the  exporter  to  bear  this 
charge.  The  outlay  must,  of  course,  be  considered  if  paid  by  the 
importer.  There  is  also  a  custom  house  entry  charge  of  from  $3 
to  $5  which  includes  a  government  tax  of  $1.  The  third  cost, 
amounting  to  1 5  cents  a  bag,  is  for  sorting  the  coffee  when  taken 
from  the  ship,  as  the  individual  consignments  are  not  kept  sepa- 
rate but  are  intermingled  in  the  ship's  hold. 

Other  expenses  are : 

1.  A  charge  of  3  cents  per  100  pounds  for  transferring  the 

coffee  from  the  ship  to  the  pier  warehouse  in  case  the 
vessel  does  not  enter  the  port. 

2.  A  charge  of  10  cents  per  bag  for  transferring  the  coffee 

from  the  pier  warehouse  to  a  licensed  warehouse. 

3.  A  charge  of  8  cents  per  bag  per  month  for  storing,  frac- 

tions of  a  month  being  considered  a  full  month. 

4.  A  charge  for  insurance  based  upon  the  value  of  the  coffee 

stored. 

In  addition  to  the  above  charges,  the  green  coffee  merchant 
must  bear  any  loss  due  to  shrinkage  of  weight.  The  Brazilian 
shipper  in  sending  his  coffee  bases  his  charge  on  132  pounds  per 
bag.  But  a  bag  may  weigh  more  or  less  than  this  amount,  and  if 
dishonest,  the  shipper  may  charge  for  more  than  the  actual  weight. 
Any  such  practice,  however,  if  continued  very  long,  results  in  the 
American  importers  discontinuing  business  with  him. 

During  shipment  and  storage  coffee  may  gain  a  little  in  weight 
due  to  its  absorption  of  moisture.  On  the  other  hand,  bags  of  coffee 
frequentlylose  weight  from  drying  or  petty  thievery.  In  fact,  such 
losses  may  amount  to  from  1%  to  2%  before  the  coffee  is  finally  sold. 


350  ACCOUNTING— THEORY  AND  PRACTICE 

The  final  charges  are  for  sampling,  weighing,  and  broker's 
commission.  When  a  shipment  of  coffee  arrives  in  this  country, 
the  steamship  company  takes  a  sample  from  each  bag  and  sends 
them  to  the  consignee  through  some  coffee-broker  who  makes  a 
charge  of  $i  per  case  for  sampling. 

Recording  Coffee  Imports 

"To  arrive"  or  import  purchases  are  recorded  in  much  the 
same  way  as  other  purchases,  although  because  of  the  many 
details  to  be  kept  track  of  in  importing,  the  form  of  the  purchase 
record  may  be  more  complex,  and  auxiliary  records  are,  therefore, 
usually  found  convenient.  In  some  cases,  however,  the  original 
papers  and  documents  connected  with  an  importation  are  not 
entered  on  a  formal  record,  merely  being  kept  together  in  a  file 
for  reference  in  case  of  need. 

At  the  time  the  contract  is  signed  with  the  exporter's  New 
York  agent,  some  firms  enter  the  particulars  of  the  contract  in  a 
contract  register  or  due  book.  This  may  be  looked  upon  as  only 
a  statistical  record,  serving  as  a  memorandum  of  the  obligation 
incurred  to  purchase.  Provision  to  indicate  payment  of  the  con- 
tract is  usually  made  a  part  of  this  record. 

A  letter  of  credit  having  been  arranged  for  under  the  terms 
of  the  purchase  contract,  a  record  of  the  transactions  under  this 
letter  is  necessary.  For  this  purpose  a  letter  of  credit  book 
(Form  i)  is  used.  One  page  of  this  book  is  devoted  to  each  bank 
issuing  letters,  and  the  information  is  entered  as  it  becomes  avail- 
able. In  applying  for  a  letter  of  credit  an  importer  cannot  tell 
the  exact  amount  a  shipment  of  coffee  will  cost;  for  this  reason 
he  applies  for  an  amount  which  will  more  than  cover  the  invoice 
price.  Hence  at  the  time  of  payment  of  draft,  there  may  be  a 
balance  in  favor  of  the  importer,  which  is  noted  in  the  balance 
section.  This  balance  lapses  automatically  unless  used  before 
the  date  of  expiry  of  the  letter  of  credit. 

For  the  purpose  of  bringing  "to  arrive"  purchases  into  the 
accounts,  a  purchase  journal  known  as  an  "importation  book" 


ACCOUNTING  IN  THE  COFFEE  TRADE 


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or  "register"  is  used.  Form  2  shows  the  type  of  information 
recorded  in  it.  Upon  the  arrival  of  the  coffee  in  port,  entry  is 
made  in  this  record  from  the  purchase  invoice.  It  will  be  under- 
stood that  the  banker  issuing  the  letter  of  credit — and  not  the 
exporter— is  the  creditor  in  all  purchases  financed  in  this  way. 
Accordingly,  current  postings  are  made  to  the  credit  of  the  various 
banks  issuing  the  letters  of  credit  used,  and  at  the  end  of  the 
month  Merchandise  Purchases  is  charged.  These  bank  accounts, 
being  few  in  number,  are  usually  carried  on  the  general  ledger. 

Coffee  purchases  are  frequently  analyzed  in  the  record  as  to 
kind,  e.g.,  Santos,  Rio,  Colombian,  Maracaibo,  Java,  etc.  This 
analysis  is  sometimes  effected  through  the  use  of  a  separate 
register  for  each  kind. 

The  commission  charged  by  the  banker  may  be  credited 
through  the  importation  register  by  being  added  to,  and  therefore 
included  as  a  part  of  the  purchase  price;  or  it  may  be  recorded 
through  the  cash  book  when  payment  is  made  to  the  bank.  Many 
costs  are  incurred  in  connection  with  imports  which  are  not  in- 
curred with  domestic  purchases.  These  have  been  enumerated 
above.  At  the  time  of  closing  the  books  these  expenses  should 
be  included  as  a  part  of  the  "cost  of  goods  sold."  The  usual 
formula,  viz.,  that  all  costs  up  to  the  point  of  sale  should  be 
considered  as  a  part  of  the  cost  of  goods  sold,  is  in  the  coffee  trade 
not  generally  apphed  to  include  storage  expense.  This  practice 
does  not  seem  to  rest  on  sound  reasoning. 

When  the  books  are  closed,  extraordinary  care  must  be  exer- 
cised to  see  that  all  liabilities  for  coffees  to  arrive  are  entered. 
The  contract  register  and  letter  of  credit  book  will  usually  furnish 
this  information.  Only  approximate  amounts  can  be  used,  except 
in  the  case  of  invoices  which  have  been  received  ahead  of  the 
coffee.   These  coffees  must,  of  course,  be  included  in  the  inventory. 

Recording  Spot  Purchases 

Domestic  purchases  are  called  "spot"  purchases,  as  distin- 
guished from  importations,  or  "to  arrive"  purchases.    Spot  pur- 


CCOUNTING  IN  THE  COFFEE  TRADE 


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VOL.  HI — 23 


354  ACCOUNTING— THEORY  AND  PRACTICE 

chases  between  green  coffee  merchants  are  usually  for  cash,  the 
amount  being  based  on  a  pro  forma  bill.  Delivery  of  the  purchase 
is  effected  by  the  transfer  of  warehouse  receipts.  Until  the  coffee 
has  been  graded  and  weighed,  the  true  amount  of  the  purchase 
cannot  be  determined.  Hence,  use  is  made  of  the  pro  forma 
invoice,  in  which  the  amount  is  based  on  the  standard  weight  per 
bag  and  the  grade  is  that  named  in  the  contract.  The  cash  pay- 
ment made  is  usually  somewhat  less  than  the  amount  so  deter- 
mined. When  the  true  invoice  is  received,  cash  payment  is  made 
for  the  balance. 

To  record  spot  purchases,  a  purchase  register  (Form  3)  or 
creditors  book,  is  used.  Since  the  transaction  is  usually  for  cash, 
less  2%,  and  first  payment  is  based  on  the  pro  forma  invoice,  with 
balance  in  10  days,  the  use  of  three  lines  for  each  creditor  and 
three  money  columns  to  record  payment,  causes  this  record  to 
serve  also  as  a  subsidiary  ledger.  Entries  in  the  record  will 
usually  show  the  debit  for  the  initial  cash  payment  several  days 
before  the  credit  appears,  a  few  days  being  necessary  to  weigh 
and  grade,  and  to  receive  the  true  invoice.  At  the  end  of  the 
fiscal  period,  any  open  purchases  on  the  register  will  be  closed  on 
the  basis  of  the  pro  forma  invoice,  Purchases  account  being 
debited  and  Accounts  Payable  credited  for  the  month's  total. 
In  the  following  month  when  the  correct  amount  is  known  from 
the  true  invoice,  another  entry  bearing  the  original  invoice  num- 
ber is  put  through  for  the  additional  amount.  The  adjustment  is 
made  through  the  general  journal  when  the  true  amount  is  less 
than  the  payment  made  on  the  pro  forma  amount. 

Marketing  Coffee 

Coffee  is  marketed  in  various  ways.  The  wholesaler  may 
distribute  his  coffee  to  retailers  either  through  brokers  or  through 
salesmen  or  both.  In  other  cases  large  importers  distribute  their 
coffee  to  consumers,  utilizing  for  that  purpose  large  chain  stores, 
or  maintaining  their  own  distributing  agents  in  each  city. 

The  expenses  borne  by  a  coffee  merchant  in  connection  with 


ACCOUNTING    N  THE  COFFEE  TRADE 


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356  ACCOUNTING— THEORY  AND  PRACTICE 

sales  vary  according  to  the  terms  agreed  upon  by  the  purchaser. 
Green  cofifee  may  be  sold  ex-ship  (from  ship) ,  in  store  (from  ware- 
house), F.  O.  B.  shipping  point  or  destination.  In  the  first  and 
second  cases  the  buyer  pays  all  transportation  charges  from  the 
ship  or  warehouse  to  his  place  of  business.  The  other  two  are 
self-explanatory. 

The  weighing  charge  amounting  to  4  cents  per  100  pounds  is 
borne  by  the  seller,  unless  otherwise  agreed  upon,  as  is  also  the 
brokerage  commission,  which  ranges  from  15  cents  per  bag  to  1% 
of  the  selling  price. 

When  a  concern  deals  with  jobbers  and  retailers,  it  secures  the 
services  of  coffee-brokers  as  well  as  the  services  of  salesmen.  It 
keeps  in  touch  with  these  brokers,  scattered  throughout  the 
country,  by  means  of  the  telegraph.  Orders  from  the  brokers  are 
received  in  code  and  confirmed  by  mail.  To  facilitate  the  han- 
dling of  these  orders,  each  sample  of  coffee  sent  to  a  broker  is 
given  a  "telegraph  number"  at  the  time  sampling  orders  are 
drawn  on  the  warehouse.  These  numbers,  which  represent  dif- 
ferent chops  of  coffee  (bags  of  coffee  of  a  given  size  in  a  given 
contract  constitute  a  "  chop  ") ,  are  entered  in  a  list  book,  in  which 
the  following  information  is  also  recorded : 

1 .  Mark  of  each  lot  represented  by  the  telegraph  number. 

2.  Chop  number  and  bags. 

3.  Price  of  each  mark. 

4.  Description  of  the  coffee. 

5.  Name  of  the  vessel  on  which  the  coffee  was  shipped. 

6.  Arrival  date. 

Price  lists  of  the  different  lots  of  coffee  on  hand  are  made  up 
weekly  and  sent  to  the  brokers  representing  the  coffee  merchant. 
These  lists  show  the  telegraph  numbers,  marks,  chop  numbers, 
number  of  bags,  and  price  per  pound  of  each  kind  of  coffee.  With 
these  lists  in  hand  a  broker  can  easily  tell  the  price  of  each  grade 
of  coffee  and  how  soon  shipment  can  be  made. 

In  sending  an  order  by  telegraph,  the  salesman  or  broker 
needs  merely  to  give  the  code  word  for  that  number,  and  when 


ACCOUNTING  IN  THE  COFFEE  TRADE  357 

the  telegram  is  received,  reference  is  made  to  the  hst  book  mider 
that  telegraph  number  for  the  marks  and  other  particulars  con- 
cerning the  coffee  wanted.  The  telegraphic  order  serves  as  evi- 
dence of  the  buyer's  acceptance  of  the  contract.  If  the  sale  is  to 
a  broker  in  the  same  city,  a  regular  contract  is  required.  Upon 
the  receipt  of  either  telegram  or  contract,  a  clerk  confirms  the 
sale  by  letter,  and  the  broker  in  his  turn  sends  an  acknowledg- 
ment.   This  is  done  to  avoid  mistakes. 

When  the  telegram  or  contract  is  received,  particulars  as  to 
vessel  and  storehouse  are  taken  from  the  stock  book  and  are 
entered  upon  the  telegram  or  contract.  A  deHvery  order  is  drawn 
on  the  warehouse  in  which  the  coffee  is  stored  and  an  order  is  sent 
to  the  weighers,  requesting  them  to  weigh  the  coffee  and  make 
shipment.  As  soon  as  the  weigher's  report  as  to  gross  weight,  tare 
of  bags,  etc.,  is  received,  the  weights  are  inserted  in  the  sales  book, 
the  amounts  are  extended,  and  the  bill  is  rendered  with  a  copy  of 
the  weigher's  return  and  bill  of  lading  attached. 

Recording  Sales 

Usually  some  form  of  analytical  sales  register  or  Journal  is 
used  for  entering  sales  on  the  books,  although  the  duplicate  sales 
invoices  with  proper  monthly  recapitulation  serve  that  purpose 
well.  The  simplest  form  of  analytical  sales  book  suitable  for  a 
concern  handling  green  coffee  only  should  provide  columns  for 
the  following  information: 

1 .  Invoice  number. 

2.  Name  of  purchaser. 

3.  Stock  book  number. 

4.  Date  of  order  to  weigher. 

5.  Date  bill  of  lading  is  mailed. 

6.  Date  of  pro  forma  invoice. 

7.  Date  of  actual  invoice. 

8.  Classification  of  sales,  as  city,  country,  export. 

9.  Number  of  bags. 

10.  Kind  of  coffee  sold,  such  as  Santos,  Rio,  etc. 


358  ACCOUNTING— THEORY  AND  PRACTICE 

The  amount  of  the  pro  forma  invoice  is  of  course  entered  only 
when  the  actual  amount  is  not  known.  Adjustment  of  the  pro 
forma  amount  when  so  entered  is  made  in  the  same  manner  as  in 
the  case  of  purchases. 

Sales  on  the  cofifee  exchange,  explained  later,  are  frequently 
kept  by  themselves  in  a  separate  register. 

The  ordinary  form  of  customers  balance  ledger  is  usually 
found.  Another  type  of  ledger  known  as  an  "  accoimts  receivable 
book  "  (Form  4)  has  some  points  to  commend  it  and  is  particularly 
convenient  for  the  purpose  of  ageing  customers'  accounts.  This 
record  does  not  show  the  volume  of  business  done  during  the 
period  with  each  customer.  Since  a  shipment  of  coffee  is  as  a  rule 
paid  for  before  another  shipment  is  made,  and  purchasers  take 
advantage  of  the  cash  discount  offered,  it  is  more  convenient  to 
record  customers'  accounts  in  a  register  instead  of  a  ledger.  This 
register  is  somewhat  similar  in  form  to  a  voucher  register.  A 
separate  page  or  several  pages  are  allotted  to  the  sales  for  each 
month  and  in  addition  country  sales  are  separated  from  city  sales. 
Each  account  appears  on  one  line  and  extends  across  two  pages. 
Normally  only  one  open  account  with  a  customer  will  be  found 
on  any  page,  although  he  may  make  several  purchases  during  the 
month.  Previous  accounts  must  be  settled  before  new  credits 
are  extended  him.  The  Due  Date  column  is  divided  into  four 
sections,  providing  space  for  four  months.  To  the  right  of  the 
How  Paid  column  there  are  six  columns  corresponding  to  the  six. 
months  in  which  payments  are  entered,  should  any  accoimt  be 
paid  in  instalments. 

The  total  of  the  amount  coliunn  shows  the  total  sales  on  credit 
for  each  month.  As  each  customer  remits,  the  date  of  payment 
and  how  paid  are  entered  on  the  same  line  as  the  account  appears. 
If  a  debtor  pays  for  a  particular  transaction  in  instalments,  the 
total  paid  on  account  during  a  month  is  entered  in  that  month's 
column.  At  the  end  of  the  month,  the  amount  and  the  month 
columns  (the  latter  showing  the  payments  made  for  that  month) 
are  totaled ;  so  that  in  any  given  month  the  difference  between 


ACCOUNTING  IN  THE  COFFEE  TRADE 


35? 


s  \  \ 

u.  / 

=^===4=======/  / 

4^1 L 

E  /  / 

i  \  \ 

»—  I  I 

c  II 

™  It 

o  I    / 

_J  I    I 

i  /  / 

z  if 

a  I    I 


36o 


ACCOUNTING— THEORY  AND  PRACTICE 


the  amount  column  and  the  sum  of  the  totals  of  the  month 
columns  for  that  particular  month  gives  the  total  of  the  accounts 
outstanding  for  that  month.  The  sum  of  the  open  accounts  for 
the  different  months  should  correspond  to  the  balance  of  the 
controlling  account  in  the  general  ledger. 

The  payments  appearing  in  the  month  columns  of  each  month 
are  posted  from  the  cash  book,  and  as  a  check  on  posting,  the  sum 
of  the  totals  of  all  the  columns  for  that  month  throughout  the 
accounts  receivable  register  should  equal  the  footing  of  the  Ac- 
counts Receivable  column  in  the  cash  book. 

Stock  Records 

Because  green  coffee  is  sold  in  standard  size  bags,  it  is  an  easy 
matter  to  operate  a  stores  or  stock  record.  The  advantages  of 
such  a  record  are  apparent  in  the  case  of  a  conmiodity  the  market 
for  which  constantly  fluctuates.  The  f  rm  of  stock  book  shown 
in  Form  5  may  be  used.  The  information  is  not  filled  in  imme- 
diately, but  gradually  as  the  data  are  received. 




stock  for  the 

Cost 

Marks 

No. 

Amount  Bags 

Amounts  Sold 

Tare 

Bought 

Received 

s  .s 

E  0 

t 

*«,»»?  j««,»s« 

n,8e9 

1 

Inweigkt     1S1,8«S 

•* 

tiO 

BOO 

U9 

Oulweighl  li 

f,SW 

2,000 

999 

lit 

*l* 

*h 

Lou 

t« 

1 

Tnueight 

13t 

Chitweight 

1 

■ 

. 

1 1 

^^ 

1-      \ 

^ 

) 

Form  5. 


The  quantity  of  each  shipment  sold  is  entered  daily,  showing 
the  number  of  bags  and  their  actual  weight.     When  the  entire 


ACCOUNTING  IN  THE  COFFEE  TRADE 


361 


quantity  received  has  been  sold,  the  actual  weight  of  the  total 
quantity  of  that  mark  and  chop  number  received  is  recorded  and 
compared  with  the  out- weight,  i.e.,  the  weight  of  the  quantity 
when  sold.  The  difference  between  the  two  shows  the  loss  in 
weight,  which  loss,  as  previously  stated,  may  be  due  to  leakage 
or  theft  from  the  bags  while  in  transit,  sampling,  the  evaporation 
of  moisture,  handling,  and  so  on.  A  separate  page  is  assigned  to 
each  month,  the  dates  of  purchase  being  the  deciding  factor. 

Weekly  Stock  Report  for  Administrative  Purposes 

In  order  that  the  coffee  merchant  may  know  the  quantity  of 
each  kind  of  coffee  in  stock,  a  "weekly  stock  report  for  adminis- 
trative purposes"  (Form  6)  is  made  up,  the  data  being  classified 
according  to  the  kind  of  coffee,  such  as  Santos,  Rios,  Maracaibos, 
etc. 

To  the  number  of  bags  in  stock  at  the  beginning  of  the  week 
are  added  the  spot  purchases  and  number  of  bags  arrived  on 
''  C  &  F  "  contracts  during  the  week.    The  number  of  bags  sold  is 


Month  of  December 

Descripfon 

Bought  of 

Date  of 
Purchase 

Ex.  Ship 

Stored 

Expiration 

Weigher 

Date|p_ 

Storage 
Paid 

Storage 

rans 

. 

Santos 

Brazilian 
Coffee  Co. 

tt/7 

Lueenie 

r/h 

Jan. 

It 

C.&H. 

1 

~ 

1 

Stock  Bock 


subtracted  from  this  sum,  the  result  giving  the  number  of  bags 
on  hand,  i.e.,  "spots"  (with  which  next  week's  report  will  begin). 


362 


ACCOUNTING— THEORY  AND  PRACTICE 


Week  Ending  December  13,  19 — 

Santos : 

Spot 
Arrived 

Sold 
Afloat 

1 

19.507 
1,000 

2 

17,821 

18,750 

3 

36,571 

20,507 
2,686 

Rio; 

Spot 
Bot.     " 

2,602 
113 

Sold 

2,715 
572 

2,143 

Bogota : 

Ailoat 

Spot 
Bot.     " 

2,171 
632 

16,000 

18,143 

Sold 

2,803 

778 

2,025 

Maracaibo 

Afloat 

Spot 
Arrived 

2,037 
1,530 

2,025 

Sold 

3,567 
800 

2,767 

Afloat 

1,615 

4.382 

2\Iisc.  Milds: 
Mocha  &  Java: 

Spot 
Sold 

Afloat 

Spot 
Arrived 

194 
10 

184 

184 

978 
250 

Sold 

1,228 
517 

711 

Afloat 

1.950 

2,661 
63,966 

Stock  12/6 

Purchases 

Arrivals 

Sales 

Santos 
Rio 

Bogota 
Mara. 
M.  M. 
M.  &  J. 

C&F 
C&F 

Spot 
Spot 
C&F 

C&F 

35.271 
18,419 

2,171 

4,554 
194 

1,355 

3,986 
183 
113 
632 
628 

1,823 

7,365 

1,000 

1.530 
250 

2,780 

2,686 

572 
778 
800 
10 
517 

5,363 

61,964 

Form  6.     Weekly  Stock  Report  for  Administrative  Purposes 


ACCOUNTING  IN  THE  COFFEE  TRADE  363 

To  this  is  then  added  the  number  of  bags  contracted  for.  To 
prove  the  accuracy  of  the  report,  the  total  stock,  spots,  and  "to 
arrives, "  at  the  end  of  the  previous  week,  the  number  of  bags 
purchased,  the  number  received,  and  the  number  sold  are  tabu- 
lated according  to  kind  at  the  bottom  of  the  sheet.  The  Arrivals 
column  does  not  enter  into  the  proof,  since  it  shows  merely  trans- 
fers from  "to  arrives"  to  "spots"  during  the  week. 

Weekly  Stock  Report  for  Insurance  Purposes 

In  order  that  the  stock  of  coffee  may  be  well  covered  by  insur- 
ance, a  stock  clerk  checks  up  at  the  beginning  of  each  week  the 
quantity  of  coffee  on  hand  at  the  various  warehouses,  and  com- 
pares its  value  with  the  amount  of  insurance  carried  the  previous 
week.    The  insurance  is  then  increased  or  decreased  accordingly. 

The  Green  Coffee  Inventory 

The  stores  record,  the  weekly  stock  report,  and  the  contract 
register  provide  the  data  from  which  the  inventory  is  taken  at  the 
close  of  the  fiscal  period.  The  information  concerning  the  in- 
ventory of  green  coffee  is  analyzed  according  to  the  name  of  the 
vessel  from  which  received,  the  warehouse  in  which  stored,  mark, 
quantity  shipped,  weight,  grade  of  coffee,  description,  price  per 
pound,  and  amount.  The  weight  of  the  unbroken  marks  is 
estimated.  If  a  part  of  each  mark  has  already  been  sold,  the 
average  weight  per  bag  is  found  and  used  in  finding  the  weight 
of  the  unsold  bags.  By  listing  all  coffee  of  the  same  kind  together, 
an  average  grade  can  be  used  for  pricing  purposes,  and  this 
eliminates  a  great  amount  of  detailed  figuring.  Because  there  is 
an  organized  exchange  for  trading  in  green  coffee,  most  merchants 
value  inventory  at  the  market  price,  i.e.,  on  a  liquidation  basis. 
Market  price,  less  2%,  the  standard  terms  for  spot  purchases,  is 
the  usual  basis.  In  order  to  keep  out  of  the  records  of  regular 
operation  any  unrealized  profit  or  loss,  cost  price  should  be  used 
for  determination  of  gross  profit,  after  which  the  adjustment  due 
to  placing  the  inventory  on  a  market  basis  should  be  shown. 


364  ACCOUNTING— THEORY  AND  PRACTICE 

This  adjustment  figure  should  be  entered  in  the  Reserve  for 
Market  Fluctuations  account,  and  both  cost  and  market  price 
should  be  shown  on  the  balance  sheet. 

The  need  for  including  all  coffees  contracted  for  but  not  yet 
received  has  been  pointed  out.  In  case  the  credit  of  the  importer 
is  poor  and  the  bank  refuses  to  release  the  coffee,  except  in  small 
lots,  the  method  of  correctly  showing  on  the  balance  sheet  the 
coffee  not  released  presents  a  nice  problem. 

II,  Trading  on  the  Exchange 

The  Coffee  Exchange — History  and  Procedure 

Dealings  on  the  New  York  Coffee  and  Sugar  Exchange  present 
many  peculiarities.  Accounting  for  these  transactions  is  depen- 
dent upon  a  knowledge  of  the  practices  and  customs  of  the  trade, 
the  more  relevant  of  which  will  now  be  explained. 

The  present  New  York  Coffee  and  Sugar  Exchange  was  in- 
corporated in  1 88 1  under  the  name  of  "New  York  Coffee  Ex- 
change." In  1885,  it  was  reincorporated  under  the  name  of  "The 
CofTee  Exchange  of  the  City  of  New  York, "  and  in  1916,  owing 
to  the  inclusion  of  sugar  as  another  commodity  handled,  it  again 
changed  its  name,  taking  the  present  one. 

Foreign  coffee  merchants  often  become  members  of  the  New 
York  Coffee  Exchange  either  to  take  advantage  of  a  reduced 
commission  to  members  and  secure  the  advantages  of  the  ex- 
change's system  of  arbitration  in  trade  disputes,  or  merely  to  se- 
cure the  standing  which  membership  in  the  coffee  exchange  gives  in 
the  trade.  To  be  eligible  for  membership,  a  man  must  be  twenty- 
one  years  old,  of  good  character  and  commercial  standing,  and 
his  nomination  must  be  approved  by  the  board  of  managers.  Once 
elected  to  membership  the  new  member  must  either  pay  an  initia- 
tion fee  of  $10,000,  or  purchase  a  membership  from  some  member. 

The  coffee  exchange  is  used  by  merchants  for  the  purpose  of 
speculating  in  coffee  or  for  the  purpose  of  preventing  by  means 
of  a  "hedge"  transaction  a  loss  on  an  importation  of  coffee. 


ACCOUNTING  IN  THE  COFFEE  TRADE  365 

Coffee  may  be  delivered  against  the  contracts  executed  on  the 
exchange,  but  in  the  majority  of  transactions  there  is  no  actual 
delivery.  Contracts  for  future  delivery,  i.e.,  ''futures"  or  "op- 
tions, "  rather  than  actual  deliveries  are  dealt  in,  and  settlement 
is  made  by  the  payment  of  differences  between  contracts.  Of 
course,  direct  settlement  can  be  made.  This  method  of  settle- 
ment is  explained  later. 

Grading  and  Pricing  of  Coffee 

The  coffee  exchange  sets  the  standard  by  means  of  which  the 
prices  for  the  different  grades  of  coffee  are  determined.  The 
prices  for  the  various  grades  are  based  upon  the  number  of  im- 
perfections in  the  green  coffee  as  compared  with  the  standard. 
Such  imperfections  consist  of  black  beans,  broken  beans,  shells, 
immature  beans  or  quakers,  stones,  and  pods.  The  black  beans 
are  taken  as  the  unit  in  calculating  the  number  of  imperfections. 
The  calculation  is  done  according  to  the  following  scale :  ^ 

3  shells  equal   one  black  bean. 

5  quakers  equal  one  black  bean. 

5  broken  beans  equal  one  black  bean. 
I  large  stone      equals  two  to  three  black  beans. 

1  medium  stone  equals  one  black  bean. 

2  small  stones    equal    one  black  bean. 
I  pod  equals  one  black  bean. 

A  i-pound  sample  of  green  coffee  is  taken  from  a  lot,  examined 
for  its  imperfections,  and  graded  according  to  the  following  scale: 

Type  No.  i     No  imperfections.    This  coffee  rarely  exists. 

Type  No.  2     6  black  beans  or  equivalent  defects. 

Type  No.  3     13  black  beans  or  equivalent  defects. 

Type  No.  4     29  black  beans  or  equivalent  defects. 

Type  No.  5     60  black  beans  or  equivalent  defects. 

Type  No.  6     no  black  beans  or  equivalent  defects. 

Type  No.  7     Graded  by  comparison  with  the  recognized  exchange 

types. 
Type  No.  8     Graded  by  comparison  with  the  recognized  exchange 

types. 

'  From  Tea  and  Coffee  Trade  Journal,  July  1917. 


366 


ACCOUNTING— THEORY  AND  PRACTICE 


Qualities  inferior  to  No.  8  are  not  admitted  into  the  United 
States. 

The  basis  for  quotations  of  the  New  York  CofTee  Exchange  is 
Rio  type  No.  7,  and  all  other  types  move  in  a  fixed  relation  to  it, 
as  shown  in  the  following  table : 


Brazilian  Coffee.    Not  Santos 

Santos  Coffee 

Other  Kinds.      Not  Brazilian 

Type 

Type 

Type 

No.  I 
No.  2 
No.  3 
No.  4 
No.  s 
No.  6 
No.  7 
No.  8 

180  points*  above  base 

ISO  points  above  base 

120  points  above  base 

90  points  above  base 

60  points  above  base 

30  points  above  base 

Base 

so  points  below  base 

No.  I 
No.  2 
No.  3 
No.  4 
No.  S 
No.  6 
No.  7 
No.  8 

260  points  above  base 
230  points  above  base 
200  points  above  base 
ISO  points  above  base 
100  points  above  base 

SO  points  above  base 
Base 

so  points  below  base 

No.  I 
No.  2 
No.  3 
No.  4 
No.  s 
No.  6 
No.  7 
No.  8 

300  points  above  base 
250  points  above  base 
200  points  above  base 
150  points  above  base 
100  points  above  base 

so  points  above  base 
Base 

so  points  below  base 

*  A  point  is  a  hundredth  part  of  a  cent. 

Thus,  if  Rio  No.  7  is  quoted  at  8.10,  Rio  type  No.  3  would 
sell  at  9.30  (8.10  +  1.20),  Santos  No.  3  would  be  quoted  at  10.10 
(8.10  +  2.00),  and  Maracaibo  No.  3  also  10.10.  The  unit  of 
quotation  is  the  pound,  the  price  of  which  is  given  in  cents  and 
decimal  fractions  of  a  cent. 


Illustrative  Exchange  Transactions 

An  example  will  make  clear  the  procedure  in  an  exchange 
transaction.  Suppose  an  importer  in  the  fall  of  the  year  orders 
500  bags  of  coffee  in  Brazil,  costing  9  cents  per  pound,  and  is 
notified  by  the  exporter's  agent  that  the  coffee  will  arrive  in  this 
country  in  December.  If  by  the  time  the  importer  receives  his 
coffee,  the  price  drops  to  8  cents  per  pound  he  will  sell  his  coffee 
at  a  loss.  He  may  prevent  the  loss,  however,  by  resorting  to  the 
method  known  as  ''hedging,"  which  consists  of  selling  on  the 
Coffee  Exchange  the  same  amount  of  coffee  for  delivery  in  De- 
cember. If  he  is  a  member,  he  will  conduct  the  sale  of  the  future 
through  his  trader;  if  he  is  not,  he  will  employ  a  broker  member 


ACCOUNTING  IN  THE  COFFEE  TRADE  367 

for  the  purpose.  Upon  receiving  the  importer's  order  to  sell,  the 
floor  trader  steps  over  to  the  ring  and  makes  an  offer  to  sell  coffee 
for  December  delivery  at  9.10  cents  per  pound,  shouting,  "Offer 
December  delivery  at  10,"  (the  number  of  cents  being  omitted 
to  save  time,  for  everybody  knows  the  number  of  cents  that  coffee 
is  being  dealt  in  at  the  time).  Assume  that  another  trader  bids 
9  cents  flat  for  December  delivery  and  that  importer's  trader 
meets  the  bid  half,  closing  the  transaction  at  9.05  per  pound. 
The  importer  is  now  under  contract  to  deliver  500  bags  of  coffee 
in  December  at  the  above  price. 

When  that  month  comes  roimd,  he  can  do  one  of  two  things 
to  fulfil  his  contract.  He  can  deliver  the  coffee  he  has  just  im- 
ported, or  he  can  buy  on  the  exchange  a  future  contract,  also  for 
December  delivery,  to  offset  the  one  he  has  purchased,  and  thus 
cancel  his  hedge.  He  usually  takes  the  latter  course.  If  the 
price  has  risen  to  10  cents  when  he  buys  a  future,  he  suffers  a  loss 
in  his  hedge  of  .95  of  a  cent,  or  the  difference  between  the  prices  at 
which  he  has  sold  and  bought  the  December  option.  However, 
he  can  sell  the  500  bags  of  coffee  he  has  just  received  from  Brazil 
at  10  cents  to  another  customer,  and  his  profit  here  offsets  his 
loss  on  the  hedging  transaction.  If,  on  the  other  hand,  the 
price  of  coffee  has  dropped  in  December  to  8  cents  per  pound,  he 
makes  a  profit  of  approximately  i  cent  per  pound  on  the  hedging 
transaction,  which  offsets  the  loss  he  sustains  when  he  sells  the 
coffee  he  has  received  from  Brazil. 

The  transactions  of  a  speculator  in  futures  differ  from  those 
of  the  importing  merchant  only  in  that  the  speculator  is  not  in- 
terested in  an  actual  delivery  of  the  coffee.  He  only  buys  and 
sells  futures  and  his  selling  transactions  usually  involve  as  a 
money  settlement  only  the  difference  between  his  buying  and 
selling  prices.  Assume  that  a  speculator  instructs  his  broker  to 
buy  two  lots  or  contracts  of  coffee  for  March  delivery,  each  lot 
consisting  of  250  bags  and  each  bag  weighing  130  pounds,  and 
that  the  price  for  Santos  7's  coffee,  March  delivery,  is  24.025 
cents  per  pound.     To  protect  the  broker's  interest,  the  specula- 


368  ACCOUNTING— THEORY  AND  PRACTICE 

tor  deposits  with  him  a  margin  of  $i,ooo,  or  $2  per  bag.  The 
broker  then  instructs  his  trader  on  the  exchange  to  purchase  two 
lots  of  Santos  7's  March  delivery.  If  the  price  of  this  coffee 
should  drop  to  23.775,  ^.nd  the  speculator  should  sell,  he  would 
sustain  a  loss  of  25  points,  or  25/100  cent  per  pound,  and  as  each 
point  per  lot  is  equal  to  $3.25,  a  lot  being  32,500  pounds,  the  loss 
would  amount  to  $81.25  per  lot,  or  $162.50  on  the  two  lots.  In 
addition,  he  would  have  to  pay  his  broker  a  commission  of  $10 
per  lot  for  buying  and  $10  per  lot  for  selling. 

A  method  of  realizing  the  day-to-day  fluctuations  in  the  mar- 
ket without  the  necessity  of  a  sale  is  also  a  feature  of  speculation 
in  coffee.  At  the  close  of  each  day  the  exchange  establishes  what 
is  called  a  "settlement  price," ^  by  comparison  with  which  the 
profit  or  loss  for  the  day  on  all  open  transactions  is  determined. 
Thus  if  a  speculator  buys  coffee  at,  say,  15.2  cents  and  at  the  close 
of  the  day  the  settlement  price  is  14.9  cents  he  has  suffered  a  loss 
of  30  points.  If  now  he  holds  the  coffee,  and  the  settlement 
price  on  the  next  day  is  15.3  cents,  he  makes  a  profit  of  40  points 
for  that  day.  These  day-to-day  profits  or  losses  are  cleared 
through  the  Coffee  Clearing  Association,  and  the  net  profit  or 
loss  for  the  day  is  received  from  or  paid  over  to  the  clearinghouse. 
Thus,  fluctuations  of  the  market  are  realized  daily. 

Exchange  Transaction  Records 

In  reporting  transactions  on  the  exchange,  particular  forms 
are  used.  When  one  broker  makes  a  sale  of  coffee  to  another, 
the  vendor  gives  the  buyer  a  signed  slip  or  memo  of  the  trans- 
action, showing  the  names  of  the  parties,  place  and  date  of 
transaction,  number  of  bags  of  coffee  and  the  kind,  the  delivery 
month,  and  price  per  pound.  The  purchasing  broker  also  writes 
a  slip  with  the  same  information.  They  then  exchange  slips, 
retaining  a  copy  (the  original)  for  their  own  information  and 
record.  These  slips  or  memos  of  the  purchase  and  sale  transac- 
tion, signed  by  the  two  brokers,  are  the  basis  for  making  the 

^  This  is  the  last  •'  bid  "  price  before  the  exchange  closes  for  the  day. 


ACCOUNTING  IN  THE  COFFEE  TRADE 


369 


NEW  YfSRK,                                                                              19 
BOUGHT  BY 

AND  CONTRACTS  OFFERED  TO   NEW    YORK   COFFEE  AND  SUGAR  CLEARING   ASSOCIATION.   INC. 
FOR  CLEARANCE   IN  ACCORDANCE  WITH   ITS   BY-LAWS   AND   RULES 

FROM  WHOM  BOUGHT 

NO. 
CONTRACTS 

MONTH 

PRICE 

1 
SETTLING 

DEDIT 
PRICE 

CREDIT 



CONTRACT  AND  POINT  TOTALS  FORWARD 


Form  7.     Bought  Sheet 


NEW  YORK,                                                                               19 

SOLD  BY 

AND  CONTRACTS  OFFERED  TO  NEW    YORK  COFFEE  AND  SUGAR  CLEARING    ASSOCIATION,   INC 
FOR  CLEARANCE   IN  ACCORDANCE  WITH   ITS  BY-LAWS   AND  RULES 

TO  WHOM  SOLD 

NO. 
CONTRACTS 

MONTH 

PRICE  ' 

ETTLINC 
PRICE 

DEBIT 

CREDIT 



CONTRACT  AND  POINT  TOTALS  FORWARD 


Form  8.     Sold  Sheet 


VOL.  Ill — 24 


370  ACCOUNTING— THEORY  AND  PRACTICE 

daily  clearing  of  profits  and  losses.  For  clearing,  three  forms 
are  used,  viz.,  the  bought  sheet  (Form  7),  the  sold  sheet  (Form  8), 
and  the  recapitulation  statement  (Form  9) .  All  bought  slips  are 
entered  on  the  bought  sheet,  and  at  the  close  of  the  day  the  point 
profit  or  loss  as  compared  with  the  settlement  price  is  extended. 
All  sold  slips  are  entered  and  extended  similarly  on  the  sold  sheet. 

On  the  recapitulation  statement,  in  the  Carried  Over  from 
Yesterday  column,  are  entered  the  number  of  contracts  for  future 
delivery  carried  over,  that  is,  not  yet  closed  out  by  sale,  if  long  or 
purchase  contracts,  or  by  purchase,  if  short  sale  contracts.  Entry 
is  analyzed  in  accordance  with  the  month  of  delivery.  Thus  all 
contracts  for  March  delivery  are  entered  on  the  March  line. 
Both  yesterday's  and  today's  settling  prices  are  shown,  the  dif- 
ference between  which  multiplied  by  the  number  of  contracts 
carried  over  from  yesterday  gives  the  point  gain  or  loss  on 
the  futures  for  the  various  months.  The  total  differences  on 
old  contracts  is  shown  by  the  column  totals.  The  debit  and 
credit  points  from  the  bought  and  sold  sheets  are  now  entered 
beneath  in  the  indicated  spaces,  and  the  total  points  on  carried 
over,  bought,  and  sold  contracts,  are  shown  and  reduced  to  dol- 
lars in  the  space  under  the  "points"  space.  The  difference  be- 
tween the  debit  and  credit  amounts  is  the  amount  of  money 
which  the  broker  owes  to  or  has  coming  from  the  clearing  house 
for  the  day.  The  settlement  with  the  clearing  house  is  made 
daily  after  the  close  of  the  exchange,  the  transaction  being  re- 
corded in  the  cash  book  as  a  debit  or  credit  to  an  account  called 
"Contract  Differences,"  to  be  explained  fully  on  pages  376-382. 

The  profit  or  loss  for  the  day  having  now  been  determined,  it 
is  necessary  to  establish  the  new  position  as  to  "carry  overs" 
for  tomorrow's  trading.  To  do  this,  today's  purchases  and  sales 
are  entered  in  Today's  Trading  column,  and  the  net  contracts 
carried  over  for  tomorrow  are  entered  in  the  column  bearing  that 
title.  Thus,  if  a  broker  carried  over  from  yesterday  20  long 
January  contracts,  bought  6  and  sold  10  January's  today,  he 
would  carry  over  16  long  January's  for  tomorrow. 


ACCOUNTING  IN  THE  COFFEE  TRADE 


371 


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372  ACCOUNTING— THEORY  AND  PRACTICE 

The  Option  Records 

A  coffee-broker  who  is  a  member  of  the  exchange  may  conduct 
transactions  both  on  his  own  account  and  for  others,  his  clients. 
It  has  been  seen  that  the  only  record  of  these  speculative  trans- 
actions appearing  on  the  general  books  is  that  made  of  the  daily 
settlement  of  differences  through  the  clearing  house.  In  order 
to  keep  track  of  the  transactions  carried  out  for  each  client  and 
also  of  those  on  his  own  account,  a  distinct  set  of  records,  known 
as  the  "option"  records,  is  kept.  Some  of  these  are  in  the  na- 
ture of  memorandum  records,  while  others  are  controlled  by 
general  ledger  accounts.  The  chief  of  these  records  are  the  clients 
or  margin  ledger,  the  option  day  book  or  blotter,  the  option 
ledger,  the  options  analysis  journal,  and  the  option  month 
book. 

Trading  on  the  Exchange 

Since  dealings  on  the  coffee  exchange  are  limited  to  members 
only,  a  speculator,  if  a  non-member,  must  apply  to  a  member  to 
buy  and  sell  for  him.  In  such  transactions  coffee-brokers  earn 
a  commission  of  $io  per  lot  for  either  buying  or  selling. 

When  a  customer  instructs  his  broker  to  buy  a  certain  number 
of  contracts  or  lots  of  coffee  on  the  exchange,  the  broker  in  his 
acknowledgment  of  the  order  specifies: 

1.  The  number  of  bags  bought  for  the  customer's  account 

and  risk,   ''on  the  coffee  exchange,  subject   to  the 
by-laws  and  rules  of  the  said  coffee  exchange." 

2.  The  number  of  bags  in  each  month's  delivery,  i.e.,  the 

number  of  bags  for  December  delivery,  March  delivery, 
etc. 

3.  The  base  price  per  pound  of  each  delivery. 

The  customer  confirms  the  acknowledgment  by  enclosing  a 
check  in  amount  equal  to  $2  per  bag,  as  margin.  When  a  receipt 
for  this  money  is  sent  to  him  the  amount  is  credited  to  his  margin 
account  in  the  clients  or  margin  ledger  kept  by  the  option  depart- 


ACCOUNTING  IN  THE  COFFEE  TRADE 


373 


ment.  This  customers  margin  ledger  is  controlled  by  a  general 
ledger  account,  which  is  credited  with  this  amount  when  the  cash 
book  footings  are  posted. 

The  purchase  made  for  the  customer  is  then  recorded  in  the 
option  day  book,  each  page  of  which  is  divided  into  two  sections, 
a  seller's  and  buyer's  section,  as  shown  in  Form  lo.    In  the  seller's 


April  S,  19 

Seller 

Lots 

Month 

Foi. 

Price 

Buyer 

Lots 

Month 

Fol. 

Price 

Broker  C 

s 

June 

s 

7.80 

Speculator  Client 

< 

June 

s 

r.so 

_- .^ ^__ 

__________ 

1 







^ 

^~ ■ 

r~ — i 

■                ■ 

' 



Avnrv 

10 

Speculator 

( 

June 

S 

T.S5 

Broker  F 

t 

June 

7 

7.SB 

Form  10.     Option  Day  Book 


section  are  entered  the  name  of  the  broker  from  whom  the  coffee 
is  purchased,  the  number  of  contracts  bought  from  each  broker, 
the  month  each  seller  expects  to  deliver,  and  the  price  contracted 
with  each.  In  the  buyer's  section  are  entered  the  name  of  the 
client  for  whom  the  lots  were  purchased,  number  of  lots  bought, 
delivery  month,  and  price. 

An  illustration  will  make  clear  the  method  of  handling  the 
option  book.  Assume  that  broker  B  purchases  two  lots  of  June 
coffee  at  7.80  from  broker  C,  for  the  account  of  a  speculator. 
The  name,  C,  is  entered  in  the  first,  or  seller's  section,  of  the  op- 
tion day  book,  the  number,  2,  is  entered  in  the  lot  column,  and 


374  ACCOUNTING— THEORY  AND  PRACTICE 

7.80  in  the  price  column.  The  name  of  the  speculator,  the 
number  of  lots  bought,  and  the  price  are  also  entered  in  the 
respective  columns  of  the  buyer's  section.  The  date  of  the 
transaction  is  recorded  across  the  two  sections  above  the  com- 
plete entry. 

Purchases  and  sales  of  coffee  options  or  futures  for  the 
broker's  own  account  are  handled  in  the  option  day  book  in  the 
same  way  as  clients'  transactions,  and  posting  of  them  is  made 
in  the  option  ledger. 

The  Option  Ledger 

From  the  option  day  book  the  above  speculator's  entry  is 
posted  to  the  option  ledger  (Form  11),  where  an  account  is  kept 
with  each  client  and  broker.  The  pages  in  this  record  are  again 
divided  into  two  sections,  each  of  which  contains  five  columns  for 
date,  lot,  month,  folio,  price,  and  an  extra  colmnn  on  each  side 
for  recording  the  number  of  points  gained  or  lost  on  the  trans- 
action. To  complete  the  first  record  of  the  illustrative  trans- 
action, the  speculator  is  credited  in  this  book  with  the  purchase 
of  two  lots  of  June  coffee  at  7.80,  while  C  is  debited  with  two  lots 
at  the  price  per  pound.  No  extensions  of  the  total  amounts 
based  on  the  unit  price  shown  are  made,  inasmuch  as  the  transac- 
tion is  speculative  and  only  when  or  if  delivery  is  made  is  it 
necessary  to  determine  the  actual  amount  of  money  involved 
based  on  the  weighers'  and  graders'  certificate.  (See  explanation 
of  exchange  deliveries,  pages  383-386.) 

When  the  broker  sells  the  coffee  contract,  upon  the  instruc- 
tions of  his  client,  the  client's  account  in  the  option  ledger  is 
debited  from  the  entry  of  the  sale  in  the  option  day  book.  His 
account  now  indicates,  in  points,  the  profit  or  loss  on  each  con- 
tract. This  point  difference  multiplied  by  the  number  of  con- 
tracts is  entered  as  a  memorandum  in  the  marginal  column  (see 
Form  11),  which  now  shows  the  gain  or  loss  on  the  whole  trans- 
action. This  "point"  profit  or  loss  expressed  in  money  is  found 
by  multiplying  the  number  of  points  gained  or  lost  by  $3.25,  the 


ACCOUNTING  IN  THE  COFFEE  TRADE 


375 


Speculator 

April 

10 

t 

June 

Fol. 
9 

7.8S 

April 

S 

* 

June 

Fol. 
7 

7.80 

10  Pte.  Credit 
Statement  i/lo 

Brok 

rC 

AprU 

S 

t 

June 

7 

7.80 

Brol 

irF 

April 

to 

t 

June 

9 

7.85 

1 , 

. 



- 

_,- ' 

1 ^ 

^— — — — ' 

Form  II.     Option  Ledger 

equivalent  of  one  point  in  dollars.     A  statement  is  then  mailed 
to  the  client  showing: 

1.  The  number  of  lots  bought. 

2.  The  price  of  each  lot  and  total  amount  of  the  lots, 

expressed  in  number  of  points. 

3.  The  number  of  lots  sold  and  their  total  price,  shown  as  a 

deduction  from  the  number  of  lots  bought. 

4.  The  profit  or  loss  both  in  points  and  in  dollars. 

If  the  transaction  shows  a  gain,  the  broker  deducts  his  com- 
mission therefrom,  the  result  signifying  a  credit  in  favor  of  the 
cHent.  If  the  transaction  results  in  a  loss,  the  broker  adds  his 
commission  thereto. 


376  ACCOUNTING— THEORY  AND  PRACTICE 

Entering  Exchange  Transactions  in  the  Financial  Records 

The  transaction,  having  now  been  completed  and  reduced  to  a 
monetary  basis,  must  be  reflected  in  the  financial  records.  When 
the  client  deposited  margin,  at  the  initiation  of  the  transaction, 
his  account  in  the  clients  ledger  was  credited,  this  ledger  being 
controlled  by  the  client's  account  on  the  general  ledger.  Now, 
the  results  of  the  completed  transaction  as  shown  on  the  state- 
ment rendered  the  client  must  be  brought  into  the  accounts.  In 
the  illustration,  the  broker  is  liable  to  his  client  for  the  profit 
made,  less  his  buying  and  selling  commissions  and  the  stamp 
taxes.  Accordingly,  the  client's  account  in  the  clients  ledger  will 
be  credited  with  the  net  amount  of  profit  accruing  to  him,  the 
Exchange  Commissions  account  will  be  credited  for  the  com- 
mission earned,  the  Stamp  account  credited  with  the  stamps 
affixed,  and  Contract  Differences  will  be  debited  with  the  gross 
amount  of  profit  made,  i.e.,  the  sum  of  the  three  credits.  To 
bring  these  data  into  the  ledger  an  options  analysis  journal  is  used 
as  shown  in  Form  12,  from  which  postings  are  made  daily  to  the 
various  clients'  accounts  and  monthly  to  the  corresponding 
control  and  other  indicated  accounts  in  the  general  ledger. 

Should  the  chent  desire  to  wind  up  his  account  with  the 
broker,  the  latter  must  return  to  him  the  margin  deposited,  plus 
3%  interest  for  such  time  as  the  broker  had  the  money  in  his 
possession,  plus  the  net  profit  on  his  trades  or  minus  the  loss. 

Nature  of  Contract  Differences  Account 

It  is  necessary  now  to  show  the  relation  of  the  Contract 
Differences  account  to  the  settlement  with  the  client.  As  ex- 
plained above,  this  account  records  the  daily  profits  or  losses 
made  as  exhibited  by  the  daily  recapitulation  statement  or  settle- 
ment sheet  with  the  exchange.  Profits  and  losses  are  entered  in 
this  account  daily  and  are,  therefore,  cumulative,  each  day's 
profit  or  loss  on  "carry  over"  contracts  being  figured,  not  on  the 
original  purchase  price  but  on  yesterday's  settlement  price  and 
the  profit  or  loss  on  new  contracts,  i.e.,  the  day's  purchase  and 


ACCOUNTING  IN  THE  COFFEE  TRADE 


377 


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§ 


378 


ACCOUNTING— THEORY  AND  PRACTICE 


sales  being  the  difference  between  the  purchase  or  sale  price 
and  the  day's  settlement  price.  Thus  upon  the  completion  of  an 
option  transaction  a  clear  and  continuous  line  of  profit  or  loss 
taken  is  traceable  from  sales  price  back  to  purchase  price,  the 
daily  profits  and  losses  as  recorded  in  Contract  Differences 
account  accumulating  to  the  difference  between  original  purchase 
and  final  sales  price.  ] 

An  illustration  will  make  this  clear.  Suppose  a  broker  buys 
for  a  client  an  option  of  3  lots  of  coffee  at  8  cents  on  January  3 
and  sells  it  on  January  8  at  8.60  cents  and  that  the  daily  settle- 
ment prices  have  been  as  follows:  January  3,  8.10  cents;  January 
4,  8.30  cents;  January  5,  8.15  cents;  January  6,  7.90  cents;  Janu- 
ary 7,  8.40  cents;  and  January  8,  8.55  cents.  To  avoid  needless 
calculation,  the  entries  are  in  "points"  although,  of  course, 
points  are  always  reduced  to  dollars  before  entry  on  the  financial 
records.  The  Contract  Differences  account  would  show  as 
follows,  covering  this  one  transaction: 

Contract  Differences 


Jan.  s 

3  lots  at  15  points     45 

Jan.  3 

3  lots  at  10  points 

30 

6 

3     "     "  25       "           75 

4 

3    "     "  20      " 

60 

7 

3     "     "  50      " 

15.0 

120 

8 

3     "     "   15       " 

ii        it        ^          n 

«5                     5 

45 
IS 

300 

All  of  these  entries  come  from  the  recapitulation  statement. 
The  first  credit  entry  of  30  points  is  based  on  the  bought  sheet 
record;  the  last  credit,  entry  of  15  points  is  based  on  the  sold 
sheet,  and  all  of  the  others,  debit  and  credit,  are  based  on  the 
Carried  Over  from  Yesterday  column  of  the  recapitulation  sheet. 
The  balance  of  the  account  shows  a  profit  of  180  points.  This  is 
the  difference  on  the  3-lot  option  bought  at  8  cents  and  sold  at 
8.60  cents.  This  profit,  now  that  the  option  contract  is  complete, 
belongs  to  the  client  and  is  transferred,  less  commission,  through 


ACCOUNTING  IN  THE  COFFEE  TRADE  379 

entry  in  the  analysis  journal,  as  explained  above,  to  his  account 
in  the  clients  ledger. 

The  Contract  Differences  account  is  thus  seen  to  be  the  de- 
pository of  the  daily  profits  and  losses  on  exchange  transactions 
and  arises  out  of  the  custom  of  daily  settlements.  In  this 
account  are  entered  both  the  transactions  for  clients  and  those 
for  the  broker  on  his  own  account.  Upon  the  completion  of 
contracts,  the  accumulated  profit  or  loss  is  transferred  either  to 
the  client's  account,  if  a  client's  contract,  or  to  the  Option  Trad- 
ing account,  if  the  broker's  own  contract.  The  form  of  options 
analysis  journal  illustrated  makes  provision  both  for  clients' 
transactions  and  for  the  broker's  own  dealings.  Provision  is  also 
made  for  showing  the  basis  of  the  stamp  tax.  The  Revenue  Act 
levies  a  tax  of  2  cents  on  every  $100  (and  fraction  thereof)  of 
value  of  all  sales  of  futures  "  at  or  under  the  rules  or  usage  of  any 
exchange."  Stamps  affixed  to  clients'  sales  are  charged  to  the 
client,  those  for  the  broker's  own  sales  are  charged  to  Option 
Trading  account,  which  is  a  profit  and  loss  account  affecting  the 
broker's  income. 

Contract  Differences  at  the  Close  of  Fiscal  Period 

The  proper  treatment  of  Contract  Differences  account  at  the 
closing  of  the  books  presents  some  interesting  phases.  Only 
when  option  contracts  have  been  completed  are  the  profits  and 
losses  on  trading  transferred  to  clients'  accounts  (showing  there 
as  liabilities  of  the  broker  to  his  clients  for  profits  made  or  asset 
claims  against  the  clients  for  losses  sustained) ,  or  to  the  Option 
Trading  account  if  representing  the  broker's  own  profits  or 
losses.  At  any  given  time,  then,  the  balance  of  the  Contract 
Differences  account  represents  the  accumulated  day-to-day  re- 
sults as  to  profits  and  losses  on  open  (i.e.,  uncompleted)  option 
transactions.  This  balance  represents  items  belonging  both  to 
clients  and  to  the  broker.  For  closing  the  books  it  is  therefore 
necessary  to  analyze  the  account  in  order  to  provide  a  basis  for 
its  proper  treatment.    An  analysis  of  the  open  options  as  shown 


38o  ACCOUNTING— THEORY  AND  PRACTICE 

either  in  the  option  ledger  or,  more  conveniently,  in  the  option 
month  book  is  necessary.  The  profits  and  losses  belonging  to 
clients,  determined  on  the  basis  of  the  difference  between  the  pur- 
chase price  of  options  and  the  last  day's  settlement  price,  will  be  the 
liability  or  asset  item  to  be  shown  on  the  balance  sheet  in  connec- 
tion with  the  clients'  accounts.  The  rest  of  the  Contract  Differ- 
ences balance,  after  taking  effect  of  the  clients'  portion,  is,  of  course, 
the  broker's  own  profit  or  loss  and  will  be  reflected  in  his  Profit  and 
Loss  account  of  that  year.  The  correctness  of  this  amount  should 
be  proved  against  his  own  open  options  shown  by  the  books. 

A  nice  point  of  theory  is  involved  as  to  the  propriety  of  taking 
into  the  accounts  the  profits  and  losses  on  open  options.  So  far 
as  the  profits  and  losses  belonging  to  clients  are  concerned,  no 
serious  objection  can  be  made  against  the  practice.  It  results 
in  placing  the  broker's  liabilities  to  clients  and  his  claims  against 
them  on  a  liquidation  basis  at  the  exchange  settlement  price  at 
the  close  of  the  year.  On  the  other  hand,  strict  conservatism 
might  seem  to  demand  that  the  broker's  own  profits  and  losses 
on  option  trading  be  not  taken  until  the  option  is  sold.  That 
position  rests  on  a  basic  principle  of  accounting  and  finance,  viz., 
not  to  take  profit  until  completion  of  a  contract.  The  situation 
is  somewhat  different,  however,  from  that  met  in  the  case  of  the 
usual  open  contract  in  other  lines  of  business.  The  custom  of 
the  trade  has  here  built  up  a  method  by  which  daily  accruals  of 
what  would  ordinarily  be  termed  "  book  "  or  "  speculative  "  profits 
are  turned  into  cash  and  are,  therefore,  realized.  This  makes  it 
possible  to  disregard  the  status  of  the  contract  as  an  open  con- 
tract and  to  apply  to  each  day  the  profits  or  losses  realized  on 
that  day's  trading  in  options. 

At  the  end  of  the  fiscal  period,  the  Contract  Differences  ac- 
count should  not  have  closed  out  into  Profit  and  Loss  the  portion 
representing  the  broker's  own  profits  or  losses,  since  that  account 
controls,  or  represents  on  the  general  ledger,  the  status  of  all 
open  options,  both  clients'  and  own,  which  will  be  carried  over 
into  the  new  year.     The  student  should  work  out  the  book- 


ACCOUNTING  IN  THE  COFFEE  TRADE       38 1 

keeping  procedure  needed  to  take  care  of  this  adjustment  so  that 
the  recording  of  all  daily  settlements  with  the  exchange  may  fol- 
low an  established  routine.  Postings  to  the  Contract  Differences 
account  are  made  from  the  cash  book  for  the  daily  payments  to 
or  receipts  from  the  exchange,  and  from  the  option  analysis 
journal  for  the  transfers  to  clients'  and  option  trading  accounts. 

Monthly  Proof  of  Contract  Differences  Account 

In  addition  to  the  method  of  proof  of  this  account  explained 
above  as  necessary  at  the  close  of  the  fiscal  period,  a  test  is  taken 
monthly  (or  oftener)  to  prove  that  all  profits  or  losses  belonging 
to  clients  for  closed  transactions  have  been  transferred  to  their 
accounts.  In  other  words,  the  test  proves  the  correctness  of  the 
clients  ledger  and  also  the  option  ledger  for  this  group  of  trans- 
actions. A  short  illustration  will  make  this  clear.  Suppose  the 
Contract  Differences  account  shows  a  balance  of  $130  debit  at  the 
end  of  March;  that  the  option  ledger — or  month  book — shows 
the  following  open  options:  A  bought  at  9.10,  B  at  10.15,  C  at 
7.90,  D  at  8.15,  and  the  broker  himself  4  lots  at  7.60,  9.40,  8.50, 
and  8.40  respectively;  and  that  the  settlement  price  for  March 
31  is  8.35.  It  is  assumed  for  simplicity  of  illustration  that  all  of 
the  above  options  are  for  the  same  deUvery  month  and  the  same 
grade  of  cofifee.     The  following  method  of  test  is  used: 


Purchases: 

I  lot  at 

9.10 

= 

910 

lot 

points 

10.15 

= 

1,015 

a 

7.90 

= 

790 

li 

8.1S 

= 

815 

(i 

7.60 

= 

760 

(( 

7.40 

= 

740 

(( 

8.50 

= 

850 

(( 

8.40 

= 

840 

(( 

6,720 

(( 

Settlement  Price 

8  lots  at 

8.35 

= 

6,680 

« 

Loss 

40 

(( 

382 


ACCOUNTING— THEORY  AND  PRACTICE 


This  loss  of  40  lot  points  reduced  to  dollars  at  $3.25  per  point 
gives  $130,  thus  proving  the  correctness  of  the  Contract  Differ- 
ences account.  The  student  will  note  that  this  obviates  finding 
the  profit  or  loss  on  each  open  option. 

Option  Month  Book 

The  broker  keeps  track  of  future  deliveries  in  exchange  trans- 
actions, so  that  he  may  know  how  many  lots  he  has  contracted 
to  receive  or  to  deHver,  in  an  option  month  book,  one  page  of 
which  is  shown  in  Form  13.  The  book  is  divided  by  means 
of  tabs  into  twelve  divisions  to  correspond  with  the  number  of 


JUNE 

Date 

Seller 

Fol. 

Price 

Date 

Buyer 

Fol. 

Price 

April  S 

Broker  C 

s 

7.80 

•'       C 

5 

7.S0 

■}  ,« 

0 

.  p 

pe 

^pac-u  a 

April  10 

Broker  F 

« 

T.Sf 

..      F 

5 

T.as 



_^ 



, ,.^--_ 

, 

Form  ij.     Option  Month  Book 

delivery  months,  and  is  somewhat  similar  to  the  exchange  de- 
livery book.  Each  page  shows  a  seller's  and  a  buyer's  section  in 
which  are  entered  the  date  of  the  transaction,  the  names,  and  the 
price  per  pound.  Using  the  previous  transactions  for  illustra- 
tion, when  B  buys  two  contracts  of  June  coffee  from  broker  C  for 
the  account  of  the  speculator  at  7.80,  the  entries  are  made  on 
the  June  page  as  shown  in  Form  13. 


ACCOUNTING  IN  THE  COFFEE  TRADE  383 

It  should  be  noted  that:  (i)  each  contract  is  entered  on  one 
line,  no  matter  if  both  are  purchased  from  the  same  broker,  and 
that  (2)  the  ch'ent's  part  of  the  transaction  recorded  to  the  right 
appears  on  the  next  line  beneath  the  last  entry  made  in  the  seller's 
section.  As  the  record  now  stands,  the  broker  can  easily  see  how 
many  lots  must  be  delivered,  what  month  delivery  is  to  be  made, 
by  whom  the  coffee  is  to  be  sent,  and  by  whom  accepted. 

In  terms  of  the  exchange,  the  speculator  is  "long  of  the 
market."  If  the  price  advances  5  points,  and  the  speculator 
wishes  to  dispose  of  his  "longs,"  he  instructs  his  broker  to  sell. 
An  entry  is  then  made  on  the  lines  opposite  the  entries  made 
in  the  buyer's  section,  recording  the  speculator  as  the  seller,  while 
the  name  of  the  purchaser  is  entered  in  the  buyer's  section  under 
the  entry  made  to  record  the  speculator's  purchase.  A  red  line 
is  then  drawn  across  the  two  sections  at  the  time  the  last  entry 
is  made,  showing  that  the  transaction  has  been  completed.  The 
line  also  shows  that  the  speculator  has  to  deliver  two  lots  of  June 
coffee  to  another  individual,  and  when  broker  C  notifies  broker 
B  that  he  is  ready  to  make  delivery,  B  can  easily  ascertain  to 
whom  the  coffee  should  be  sent,  inasmuch  as  the  open  lines  in  the 
seller's  section  will  indicate  this. 

Delivery  of  Coffee  on  an  Exchange  Transaction 

While  dealings  in  futures  are  usually  speculative  and  do  not 
contemplate  delivery,  the  broker  may  at  times  desire  to  make 
delivery.  If  so  he  must  give  the  buyer  notice  of  his  intention  to 
deliver  5  days  before  the  first  of  the  month  in  which  dehvery  is  to 
be  made.  It  often  happens  that  the  broker  who  originally  made 
the  purchase  may  in  the  meantime  have  closed  out  his  trans- 
action, i.e.,  he  may  have  sold  his  contract  to  another  broker. 
When  the  original  purchaser  receives  notice  of  delivery,  he  in- 
dorses the  notice  over  to  the  party  who,  in  the  language  of  the 
Street,  "took  his  end,"  i.e.,  the  one  to  whom  he  transferred  his 
right  to  receive  the  coffee,  until  finally  the  rightful  purchaser  is 
located.    In  the  meantime  the  original  vendor,  before  knowing 


384       ACCOUNTING— THEORY  AND  PRACTICE 

who  is  to  receive  the  coffee,  prepares  two  lots  of  250  bags  each,  or 
thereabouts,  for  delivery,  by  having  them  weighed  and  graded 
by  licensed  weighers  in  compliance  with  the  rules  of  the  New  York 
Coffee  and  Sugar  Exchange .  Application  is  then  made  to  the  ware- 
houses for  negotiable  receipts  so  that  the  coffee  maybe  transferred. 

Method  of  Making  Delivery 

In  making  delivery  a  sampling  order  for  each  lot  must  first  be 
given  to  the  receiving  party.  A  certificate  of  weights  is  issued 
by  the  weighers,  and  a  certificate  of  grades,  signed  by  the  graders, 
is  issued  by  the  exchange.  In  every  case  these  weighers  and 
graders  must  be  licensed  by  the  exchange.  The  certificate  of 
grade,  quality,  and  condition  contains  the  following  information: 

1 .  Number  of  bags. 

2.  Name  of  person  delivering,  and  name  of  original  person 

receiving, 

3 .  Marks  and  chop  numbers. 

4.  Quantity. 

5.  Grade  of  coffee. 

If  an  arbitrator  has  also  graded  the  coffee,  his  findings  are 
listed  apart  from  the  grader's  findings  according  to  mark  and 
chop  numbers,  quantity  and  grade.  The  total  number  of  chops, 
total  quantity,  and  average  grade,  as  stated  by  the  graders,  or, 
in  the  case  of  arbitration,  by  the  arbitrators,  are  then  shown  at 
the  bottom  of  the  certificate.  The  superintendent  of  the  ex- 
change places  his  signature  underneath  this  information,  certify- 
ing to  the  fact  that  the  graders  and  arbitrators  have  been 
appointed  by  the  exchange. 

When  the  weighing  and  grading  certificates  are  received,  they 
are  attached  to  the  warehouse  receipt,  by  means  of  which  title 
to  the  contracted  coffee  is  transferred  to  the  buyer,  and  an 
invoice  is  rendered. 

The  completion  of  delivery  is  recorded  by  the  vendor  in  the 
exchange  delivery  book.     Each  lot  consisting  of  250  bags  is 


ACCOUNTING  IN  THE  COFFEE  TRADE 


385 


entered  separately,  no  matter  if  two  or  more  lots  have  been  sold 
to  the  same  customer.     Form  14  shows  the  method  of  entry. 


April  25,  19— 

(Name  of  Party 

to  receive) 

250      Bags 

Rio 

Lot  756 

HR 

S               8 

26 

3,392       Portuguese  Pr.  815  R/32 

10 

76 

9,916 

T              3 

21 

2,744 

6 

71 

9.312 

8 

56 

7.320 

32,684 

332 

3,019 

•25 

32,352       @  9-3328f5 

Basis  No.  7 

7-05f^ 

Av.  Grade 

2  —  2172 

Price 

9-3328ff 

250      Bags 

Rio 

Lot  757 

HR 

S               8 

15 

1,972      Portuguese  Pr.  815  R/32 

18 

25 

3.232 

26 

40 

5^124 

28 

50 

6,568 

B              3 

43 

5,572      Asiatic  Pr.  828  R/31 

4 

31 

4,024 

12 

14 

1,824 

M 

32 

4,196 
32,512 

332 

2,958 

.18 

32,180      @  9.i926f5 

Basis  No.  7 

7-05>5 

Av.  Grade 

3  +  1426 

Price 

9.i926)if 

Form  14.     Exchange  Delivery  Book 


AfOL.  11; — 2$ 


386       ACCOUNTING— THEORY  AND  PRACTICE 

This  book  is  really  an  old-fashioned  sales  journal.  As  each  lot 
is  entered,  the  customer's  account  is  debited,  while  at  the  end  of 
the  month  the  Accounts  Receivable  controlling  account  is  debited 
and  Exchange  Deliveries  or  Sales  account  credited.  It  should 
be  noted  that  the  sales  made  on  the  exchange  are,  for  statistical 
purposes,  kept  separate  from  those  made  by  the  sales  department. 
The  reader  will  see  that  a  client  who  has  bought  a  future  can 
demand  delivery  of  it,  but  he  can  never  make  delivery  of  it 
on  a  sale  through  the  broker,  because  as  soon  as  he  sells,  the 
transaction  passes  out  of  the  records  of  the  broker.  If  he  has 
sold  short,  he  may  make  delivery  from  his  own  stock,  but  if  he 
buys  to  cover,  the  transaction  passes  out  of  the  records. 

Joint-Exchange  Transactions 

Joint-venture  transactions  are  frequently  entered  into  either 
between  members  of  the  exchange  or  between  a  member  and 
non-members.  If  such  ventures  are  numerous  a  joint- venture 
ledger  is  used  controlled  by  an  account  on  the  general  ledger. 
The  general  principles  of  joint-venture  accounting  govern  the 
method  of  recording  these  transactions.  To  reach  the  general 
books,  these  transactions  on  the  exchange  will,  of  course,  clear 
through  the  Contract  Differences  account. 

III.  Roasting,  Jobbing,  and  Retailing 

Organization  of  Business 

To  prepare  green  coffee  for  consumption,  it  must  be  roasted. 
The  process  is  simple,  but  the  equipment  necessary  ranges  from 
the  oven  pan  of  the  housewife  who  does  her  own  roasting  to  the 
elaborate  roasting  ovens  and  automatic  grinding,  weighing,  and 
packing  devices  of  the  modern  commercial  roaster.  Many  fine 
points  of  the  trade  are  not  apparent  to  the  outsider,  both  as  to 
methods  used  and  also  as  to  the  niceties  of  judgment  necessary  in 
determining  how  far  the  roasting  process  must  proceed  to  secure 
the  finest  flavor,  and  how  best  to  preserve  it  in  the  package. 


ACCOUNTING  IN  THE  COFFEE  TRADE  3^7 

Roasting  is  not  usually  carried  on  as  a  separate  business, 
being  in  most  cases  one  department  of  a  general  coffee  business. 
One  concern  may  buy  its  green  coffee,  roast  it,  and  sell  it  to  a 
jobber,  while  another  may  sell  its  roasted  coffee  direct  to  the 
consumer  by  means  of  a  store  or  a  traveling  market.  The  large 
roaster  may  not  only  roast  for  himself  but  also  for  the  smaller 
merchant  who  does  not  have  a  roasting  plant.  Roasted  coffee 
may  be  a  department  in  a  wholesale  grocery  business.  The  retail 
merchant  dealing  in  coffee  seldom  limits  his  trade  to  this  one  com- 
modity. He  may,  in  addition,  deal  in  teas,  spices,  extracts, 
baking  powders,  rice,  sugar,  nuts,  candies,  etc.  It  will  be  seen, 
therefore,  that  the  determination  of  cost  of  doing  business  and 
prorating  it  over  the  various  commodities  handled  is  the  chief 
problem  in  connection  with  the  retail  coffee  business.  Where 
roasting,  also,  is  carried  on,  a  knowledge  of  roasting  costs  is  essen- 
tial as  a  guide  both  in  connection  with  the  roaster's  own  costs 
and  in  connection  with  fixing  a  price  for  trade  roasting. 

Roasting  Costs 

The  cost  of  the  roasted  coffee  includes  both  the  cost  of  the 
green  coffee  and  the  expense  of  roasting  it.  The  roasting  ex- 
pense factor  is  fairly  constant,  whereas  the  cost  of  the  green  coffee 
entering  into  the  roast  is  variable  according  to  the  grade  used 
and  according  to  market  conditions.  It  should  be  noted  also 
that  the  shrinkage  caused  by  the  roasting  is  an  important  cost 
which  should  not  be  overlooked.  While  many  factors  enter  into 
this,  such  as  the  age  of  the  coffee  (it  being  drier  with  age) ,  condi- 
tion of  climate  and  storage  as  to  moisture,  etc.,  so  that  there  can- 
not be  a  uniform  standard  of  shrinkage,  the  customary  figure 
used  by  the  trade  is  i6%.  One  poimd  of  green  coffee  comes  out 
of  the  roasters,  therefore,  as  .84  pounds  of  roasted  product.  A 
loss  in  weight  of  16%  is  a  very  considerable  factor  of  cost.  A 
roaster  should  make  periodic  weight  tests  to  determine  what  his 
shrinkage  loss  is,  weighing  the  coffee  before  and  after  roasting. 

The  expenses  of  roasting  consist  of  direct  labor  and  overhead. 


388  ACCOUNTING— THEORY  AND  PRACTICE 

The  roasting  labor  costs  consist  of  the  wages  of  the  roasters  and 
helpers  engaged  in  the  process  of  roasting  and  also  of  the  wages 
of  floor  truckmen  and  helpers  moving  the  green  coffee  from  the 
storeroom  on  the  premises  to  the  roasters  or  to  the  elevators. 
This  labor  cost  should  not  include  the  wages  of  any  men,  helpers, 
floor  truckmen,  and  packers  engaged  in  bagging,  grinding, 
moving,  or  packing  the  roasted  coffee. 

The  overhead  expense  or  burden  consists  of  the  following: 

1.  Superintendence 

2.  Power 

3.  Lighting  and  heat 

4.  Fuel  and  supplies 

5.  Machinery  and  equipment  repairs  and  maintenance 

6.  Depreciation  of  machinery  and  equipment 

7.  Building  expense  (exclusive  of  depreciation) 

8.  Depreciation  of  building 

9.  Insurance 

10.  Rent 

1 1 .  Sundry  roasting  expense 

At  the  close  of  a  month  or  other  period,  the  accurate  segrega- 
tion of  roasting  expenses  compared  with  the  record  of  pounds  of 
roasted  coffee  taken  from  the  roaster  makes  possible  a  determina- 
tion of  each  of  the  elements  of  expense  on  a  per  pound  basis.  If, 
in  addition  to  this,  a  record  is  kept  of  the  idle  time  of  the  roasting 
ovens,  valuable  comparisons  of  month-to-month  operations  can 
be  made. 

Grinding  and  Packing  Expense 

More  and  more,  coffee  is  being  sold  to  the  consumer  in  made- 
up  packages  and  in  ground  form.  The  coffee  merchant  who  pre- 
pares his  own  coffee  for  the  trade  must  include  in  his  cost  of  goods 
sold  all  costs  up  to  the  point  of  putting  the  contmodity  in  salable 
jicndition.  If  he  sells  the  roasted  bean  in  packages  or  ground  and 
in  package,  the  expenses  of  grinding  and  packing  must  be  added 


ACCOUNTING  IN  THE  COFFEE  TRADE  389 

to  the  cost  of  the  green  berry  plus  the  roasting  expenses  in  order 
to  determine  full  cost.  These  expenses  include  not  only  the  cost 
of  containers  and  supplies  used  in  packing,  but  also  the  labor 
employed  in  this  process.  In  addition  the  following  overhead 
or  burden  will  be  added : 

1 .  Grinding  and  packing  superintendence 

2.  Power,  lighting,  and  heat 

3.  Machinery  and  equipment  repairs  and  maintenance 

4.  Depreciation  of  machinery  and  equipment 

5.  Building  expense  (exclusive  of  depreciation) 

6.  Depreciation  of  building 

7.  Insurance 

8.  Rent 

9.  Sundry  other  expenses 

For  comparative  purposes  these  costs  should  also  be  reduced 
to  a  per  pound  basis. 

Overhead  Expenses  and  Their  Distribution 

Except  in  the  largest  roasting  plants,  it  is  seldom  possible  to 
make  physical  segregation  of  the  various  elements  of  roasting 
and  grinding  and  packing  costs.  The  two  hsts  of  these  ele- 
ments given  above  are  intended  as  indicative  of  the  items  to  be 
considered  in  an  accurate  determination  of  costs  rather  than  as 
account  titles  carried  on  the  ledger.  In  practice  one  more  often 
finds  just  two  accounts,  viz.,  Roasting  Expense,  and  Grinding 
and  Packing  Expense.  The  size  of  the  business  and  the  informa- 
tion needed  must  govern  the  degree  of  analysis  secured  by  the 
accounts.  Even  where  a  somewhat  detailed  analysis  is  made, 
many  costs  applicable  both  to  roasting  and  to  grinding  and  pack- 
ing are  currently  booked  in  the  one  account  and  distributed 
periodically  to  the  two  processes.  For  example,  where  the  same 
employees  are  used  on  both  processes,  only  one  account  would 
be  opened  for  labor,  the  charge  being  allocated  periodically 
partly  to  roasting,  and  partly  to  grinding  and  packing,  according 


390  ACCOUNTING— THEORY  AND  PRACTICE 

to  the  distribution  of  effort  in  these  processes.  The  same  is  done 
in  connection  with  the  superintendence  charge. 

The  portion  of  the  power  charge  distributed  to  roasting  in- 
cludes all  charges  incurred  for  the  use  of  power,  in  operating  all 
machines,  elevators,  etc.,  for  moving  the  green  coffee  to  the 
roasters  and  in  operating  all  polishing,  sorting,  or  sizing  and 
blending  machines.  It  also  includes  all  charges  for  electrical 
inspection,  meter  rentals,  and  other  simdry  electrical  charges. 
The  power  charge  distributed  to  grinding  and  packing  includes 
that  portion  of  the  expense  which  is  incurred  for  the  purpose  of 
executing  such  operations. 

The  customary  bases  are  used  for  the  distribution  of  light, 
heat,  depreciation,  etc. 

The  fuel  and  supplies  expense  consists  of  the  cost  of  the  fuel 
(gas,  electricity,  or  coal)  consumed  in  the  process  of  roasting. 

The  charge  for  containers  and  supplies  regarded  as  a  grinding 
and  packing  cost  represents  the  cost  of  all  containers  for  the 
packing  of  ground  coffee,  paper  bags,  pasteboard  cartons,  tin 
cartons,  etc.,  and  all  supplies  in  connection  with  the  above,  such 
as  paper  linings,  labels,  wrappers,  glue,  paint,  etc. 

Proper  Treatment  of  Insurance 

When  roasting  is  done  in  the  same  building  in  which  the  sell- 
ing and  administrative  offices  are  located,  the  premium  on  the 
insurance  for  the  building  is  higher  than  in  the  case  where  the 
roasting  is  done  in  a  separate  building.  For  this  reason  the  coffee 
merchant  maintains  that  the  roasting  process  should  be  burdened 
with  the  extra  cost.  This  is  in  accord  with  correct  accounting 
practice,  but  such  extra  charge  should  not  be  lumped  with  the 
normal  amount  of  insurance  but  should  be  shown  as  an  additional 
cost  of  roasting.  For  example,  assume  that  three-quarters  of  the 
building  are  devoted  to  general  uses,  warehouse,  sales,  office,  etc., 
and  one-quarter  is  occupied  by  the  roasting  department;  that  the 
insurance  premium  is  $800;  and  that  if  the  roasting  department 
did  not  occupy  its  portion  of  the  building,  the  insurance  premium 


ACCOUNTING  IN  THE  COFFEE  TRADE       391 

would  amount  to  $400.  Manifestly,  $300  (3/4  of  $400)  is  the  proper 
charge  of  the  other  departments  and  roasting  should  bear  $500  in- 
surance cost.  This  cost  should  be  shown  in  two  items,  viz.,  normal 
insurance,  $200  (1/4  of  $800),  and  additional  insurance  due  to 
roasting,  $300,  this  latter  item  being  shown  as  in  Schedule  B-ia, 
page  394,  in  order  to  segregate  this  from  the  normal  cost  items. 

Roasting  for  the  Trade 

It  is  practically  impossible  for  a  roaster  to  segregate  the  cost 
of  roasting  coffee  for  others  from  the  cost  of  roasting  his  own  coffee. 
Therefore,  to  determine  these  costs,  the  total  cost  of  all  roasting 
is  first  determined  and  it  is  divided  by  the  total  number  of  pounds 
roasted  during  the  same  period.  This  gives  a  per  pound  cost, 
which  multiplied  by  the  number  of  pounds  roasted  for  the  trade 
gives  the  cost  of  the  service  charge  made  to  others  for  roasting. 
This  compared  with  that  charge,  i.e.,  the  "  trade  roasting  income," 
shows  the  gross  profit  or  loss  earned  on  it. 

Departmentization  and  Its  Importance 

Since  the  retail  coffee  business  usually  deals  in  a  number  of 
commodities  besides  coffee,  wherever  possible  it  is  valuable  as  a 
means  of  control  to  departmentize  the  results  of  the  business. 
Only  in  this  way  can  sales  effort  be  properly  directed  and  the  rela- 
tive value  of  the  various  departments  be  determined.  For  mak- 
ing the  record  by  departments,  sales  will  be  analyzed  by  means 
of  the  sales  ticket,  a  different  color  or  number  being  used  for  each 
department.  Purchases  must,  of  course,  be  analyzed  on  the  same 
basis.  For  a  business  dealing  in  green  as  well  as  roasted  coffee 
and  various  other  commodities,  the  departmentization  shown  in 
the  following  forms  will  usually  suffice.  These  comprise  a  typical 
profit  and  loss  statement,  with  supporting  schedules  for  cost  of 
goods  sold,  cost  of  roasting,  and  grinding  and  packing  costs.  The 
student  should  note  how  the  cost  of  green  coffee  transferred  to 
roasting  is  handled  and  also  the  distribution  of  roasting  costs  be- 
tween cost  of  roasted  coffee  sales  and  cost  of  trade  roasting  income. 


392 


ACCOUNTING— THEORY  AND  PRACTICE 


Exhibit  B 

The  X  Y  Z  Corporation 

Statement  of  Profit  and  Loss 

For  Year  Ending  December  31,  19- 


Roasted 
Coffee 

Green 
Coffee 

Tea 

Spices   and 
Extracts 

Trade 
Roasting 

Total 

5750,000 
37.500 

$900,000 
21,000 

$75,000 
4.500 

$45,000 
3,000 

$30,000 

Less — Returns   and   Allow- 

66,000 

Net  Sales 

$712,500 
593,954 

$879,000 
756,900 

$70,500 
47.8SC 

$42,000 
39,000 

$30,000 

24,000 

$1,734,000 
1,461,704 

Cost  of  Goods  Sold  (See 
Schedules  B-i  &  B-ia) 

$118,546 

$122,100 

$22,650 

$  3.000 

$  6,000 

$272,296 

Selling  Expenses: 

Salesmen's  Salaries,  Commission,  and  Bonus. .. . 

Salesmen's  Traveling  and  Other  Expenses 

Delivery  Expenses 

Sundry  Selling  Expense 

Advertising 

General  Administrative  Expenses: 

Management  and  Office  Salaries 

Office  Supplies  and  Postage 

Sundry  Office  Expense 

Light  and  Heat  (Except  for  Roasting) 

Repairs  and  Maintenance  (Except  for  Roasting).. 

Depreciation  (Except  for  Roasting) 

Insurance  (Except  for  Roasting) 

Taxes    (Except    Federal    Income    and    Excess 
Profits) 

Financial  Management  Expense  and  Income: 

Sales  Discount 

Credits  and  Collection  Expense 

Bad  Debts 

Interest  Cost 


$45,000 

7.500 

24,400 

5.000 

9,600     $91,500 


$33,825 
1,500 
5,000 
2,600 

2,500 

3.S00 

650 

3.250      52,835 


JI5.S0O 
7,500 
8,700 
2,250     $33,950 


Dcduil: 

Purchase  Discount $12,900 

Interest  Income 1,325       14,225 


Net  Fmanciai  Management  Expense  , 


19,72s 


T>  )tai  Operating  Expense 164,050 


Nil  Operating  Profit $108,246 


ACCOUNTING  IN  THE  COFFEE  TRADE 


393 


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394  ACCOUNTING— THEORY  AND  PRACTICE 

Schedule  B-ia 

The  X  Y  Z  Corporation 

Cost  of  Roasting 

For  Period  Ending  December  31,  19 — 

Cents  per 
Roasted  Pound 

Roasting  Superintendence. $  4.800.00  .072 

Roasting  Labor 12,000.00  .181 

Power 3,000.00  .045 

Lighting 585.00  .009 

Fuel 2,500.00  .038 

Machinery  and  Equipment  Repairs 

and  Maintenance 1,365.00  .021 

Building  Expense  (Exclusive  of  De- 
preciation)    1,650.00  .025 

Depreciation  of  Building 1,320.00  .020 

Depreciation    of    Machinery    and 

Equipment 3,450.00  .052 

Insurance 7S-oo  •ooi 

Sundry  Other  Expenses 1,100.00    $31,845.00    .016     .480 

Additional  Insurance  due  to  Roasting iS5-oc  .002 

Cost  of  Roasting  6,639,004  lb $32,000.00  .482 

Own  Coffee  Roasted 1,659.751  lb. 

Trade  Coffee  Roasted.  .  .4,979.253   " 

Cost  of  Trade  Roasting  (Carried  to  Ex- 
hibit B)  (4,979,253  X  .48252!') $24,000.00 

Cost  of  Roasted  Coffee  (Carried  to 
Schedule  B-i)  (1,659,751  X.482^)..         8,000.00    $32,000.00 

Schedule  B-ib 

The  X  Y  Z  Corporation 

Schedule  of  Grinding  and  Packing  Costs 

For  Year  Ending  December  31,  19 — 

Superintendence $    400.00 

Labor 2,000.00 

Containers  and  Supplies 9,500.00 

Power  and  Lighting 350.00 

Machinery  and  Equipment  Repairs  and  Maintenance        135.00 


ACCOUNTING  IN  THE  COFFEE  TRADE 


395 


Depreciation  of  Machinery 185.00 

Building  Expense 165.00 

Depreciation  of  Building 1 24.00 

Insurance 30.00 

Sundry  Other  Expense 125.00 

Total $13,014.00 


Price  Determination 

While,  in  the  final  analysis  of  a  free  market,  prices  are  deter- 
mined by  the  laws  of  demand  and  supply,  every  merchant  should 
know  what  is  the  approximate  cost  of  a  commodity  in  order  to 
determine  and  fix  the  price  at  which  he  can  afford  to  sell  it.  For  a 
commodity  in  which  price  fluctuations  are  frequent  and  it  seems 
desirable  or  necessary  to  take  cognizance  of  replacement  cost  of 
his  stock-in-trade,  an  accurate  knowledge  of  current  costs  as 
compared  with  past  costs  is  absolutely  essential.  Only  by  this 
means  is  it  possible  in  periods  of  market  readjustment  to  guide 
intelligently  the  operations  of  a  business.  For  this  purpose,  the 
following  schedule  indicates  what  may  be  done.  If  the  data 
have  been  accurately  compiled,  as  detailed  a  statement  as  desirable 
may  be  made. 

Price  Necessary  to  Cover 


Cost  of 

Shrinkage 

Roasting 

Green 

in 

Costs 

Coffee 

Roasting 

SOji  per 

(^  per  lb.) 

16% 

100  lbs. 

6 

7-iS 

7.65 

tVi 

7.74 

8.24 

7 

8.33 

8.83 

7H 

8.93 

9-43 

8 

9-52 

10.02 

9 

10.71 

II. 21 

10 

11.90 

12.40 

Grinding  & 

Packing 

Costs    25^   per 

100  lbs. 


7.90 
8.49 
9.08 
9.68 
10.27 
11.46 
12.6s 


Selling 

Expenses 

10%  of 

Sales 


8.887s 
95513 
10.21S 
10.89 
11.5538 
12.892s 
14-2313 


General  Ad- 
ministrative 
Expenses  7% 
of  Sales 


9.5788 
10.2942 
11.0095 
"■737 
12.4524 
13.8953 
IS. 3382 


Fair  Profit 
3%   of   Sales 
(Sales  Price) 


9.87s 
10.613 
11-35 
12.1 
12.837s 
14-3251 
15.8126 


Each  column  carries  the  price,  based  on  the  per  pound  price 
of  green  coffee,  necessary  to  take  care  of  the  item  of  cost  shown  in 
the  column  title. 


CHAPTER   XI 

PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING 
By  p.  E.  Bacas 

Development  of  the  Department  Store 

A  department  store  is  a  com"bination  of  a  number  of  individual 
stores  or  selling  organizations  called  "departments"  under  one 
roof  and  a  single  management.  The  development  of  the  depart- 
ment store  to  the  size  attained  by  the  big  modern  organizations 
is  a  natural  growth  following  the  expansion  in  means  of  produc- 
tion and  exchange.  The  bigger  the  city,  the  bigger  and  more 
numerous,  as  a  rule,  are  its  department  stores.  A  retail  mer- 
chant opens  a  store  or  two  handling  a  few  lines,  and  if  his  store 
is  centrally  located  and  he  proves  a  capable  man  of  business, 
sooner  or  later  the  possibilities  of  expansion  suggest  themselves 
and  in  this  way  the  department  store  grows.  From  such  small 
beginnings  as  these  have  sprimg  our  best  known  and  largest 
department  stores. 

Organization 

The  departments  and  the  store  management  can  be  compared 
to  our  state  and  national  governments.  To  the  departments 
are  delegated  duties  in  connection  with  the  buying  and  selling 
of  merchandise  and  to  a  certain  extent  its  display.  The  man- 
agement retains  the  administration  of  such  matters  as  are 
common  to  the  business  as  a  whole,  such  as: 

1 .  Maintenance  and  operation  of  the  plant. 

2.  Receiving  and  delivering  the  merchandise. 

3.  Advertising  and  publicity. 

396 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING    397 

4.  Supervision  of  the  departmental  activities  as  a  whole. 

5.  Financing. 

6.  Accounting. 

The  organization  of  the  executive  departments  depends 
largely  on  the  capabilities  of  the  owners  of  the  store  or  their 
deputies.  The  combination  of  duties  performed  by  certain 
executives  or  the  variety  of  the  merchandise  handled  by  a  de- 
partment in  many  cases  is  determined  by  the  ability  and  the 
qualifications  of  the  employee  entrusted  with  the  duties  and 
responsibiUties.  As  a  general  rule,  however,  the  administration 
is  divided  into  the  three  groups  of  : 

1 .  Merchandising  and  publicity. 

2.  Maintenance  and  operation  of  plant  and  equipment. 

3.  Financing  and  accoimting. 

The  executive  in  charge  of  the  first  group  of  activities  is 
responsible  for  the  functions  of  buying,  selling,  displaying,  and 
advertising. 

The  executive  in  charge  of  the  maintenance  and  operation  of 
the  plant  and  equipment  may  also  supervise  the  employment  of 
the  help  and  in  a  large  establishment  he  organizes  the  personnel 
or  welfare  work. 

The  executive  responsible  for  the  third  group  of  activities 
takes  care  of  the  financing,  the  controlling  and  recording  of  the 
receipts  and  disbursements,  and  the  recording  of  merchandise 
transactions. 

Financing 

Though  some  large  department  stores  are  operated  as  sole 
proprietorships  or  partnerships,  the  majority  are  carried  on  under 
the  corporate  form  of  organization.  Such  corporations,  in  prac- 
tically every  case,  have  been  organized  to  take  over  either  a  sole 
proprietorship  or  a  partnership  business  and  seldom  if  ever  to 
operate  a  new  department  store  for  which  an  entire  stock  of 
merchandise  must  be  purchased. 


398  ACCOUNTING— THEORY  AND  PRACTICE 

The  capital  of  the  department  store  generally  consists  of  com- 
mon and  preferred  stocks,  though  in  a  few  cases  bonds  have  been 
issued.  Notwithstanding  the  fact  that  there  are  hundreds  of 
large  department  stores  in  this  country,  the  securities  are  closely 
held  by  the  corporate  owners  and  only  a  few  stores  are  included 
in  the  active  list  of  the  principal  stock  exchanges.  If  the  man- 
agement is  sound  and  conservative  a  fairly  large  credit  accom- 
modation can  be  obtained  from  the  local  banks  for  the  purpose 
of  financing  the  seasonal  purchases,  which  are  generally  the 
heaviest  in  the  early  fall.  As  the  bulk  of  a  department  store's 
assets  are  current,  consisting  as  they  do  of  cash,  accounts  receiv- 
able, and  inventories,  the  financial  statements  usually  meet  the 
chief  requirement  of  a  bank  from  its  borrowers,  viz.:  that  the 
current  assets,  in  amount,  shall  be  at  least  double  the  current 
liabiUties.  The  fulfilment  of  this  condition,  coupled  with  the 
fact  that  the  accounts  receivable  and  the  inventories  can  be  read- 
ily converted  into  cash,  places  the  ably  managed  department 
store  well  towards  the  top  of  the  list  of  borrowers  to  whom 
the  banks  give  preference. 

Sales  Records — ^The  Sales  Slip 

In  recording  sales  the  common  practice  is  to  make  the  first  or 
original  entry  in  duplicate  or  triplicate  on  perforated  sales  sheets 
bound  in  a  sales  book  in  sets  of  fifty  except  where  cash  sales 
are  recorded  on  cash  registers.  The  modern  type  of  register  used 
in  many  stores  prints  a  slip  giving  the  serial  number  of  the  sale, 
the  name  or  number  of  the  department  and  of  the  sales  person, 
and  the  amount  of  the  sale.  By  the  use  of  separate  drawers,  and 
separate  recording  and  adding  devices  in  the  cash  register,  the 
sales  of  as  many  as  six  salespersons  can  be  segregated.  Only  on 
alternate  or  every  third  day  are  the  same  sales  books  used,  in 
order  that  the  auditing  department  may  abstract  the  entries 
during  the  one  or  two  days  intervening. 

The  sales  slip  prepared  for  a  charge  or  C.O.D.  sale  contains 
the  following  information: 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING    399 

Serial  number 

Department  number  or  letter 
Salesperson's  number 
Date 

Name  and  address  of  customer 
Description  of  article,  including  price  and  amount 
Name  of  the  person  making  the  purchase,  where  the  pur- 
chase is  made  on  the  customer's  order 

One  copy  of  the  sales  slip  is  placed  in  the  package  to  be  taken 
by  or  delivered  to  the  customer,  the  second  copy  goes  to  the 
central  cashier  or  the  charge  desk,  and  the  third,  where  a  tripH- 
cate  is  prepared,  remains  in  the  sales  book.  A  tally  card,  which 
is  a  summary  of  the  daily  sales,  with  columns  for  the  amount  of 
the  cash,  charge,  and  C.O.D.  sales,  is  generally  prepared  by  each 
salesperson.  This  card  is  taken  up  with  the  sales  Ust  at  the  close 
of  the  day.  Where  cash  registers  are  not  in  use,  the  money  re- 
ceived by  each  salesperson  is  transmitted  to  a  central  cashier  by 
means  of  pneumatic  tubes  or  in  little  overhead  metal  carriers. 
In  a  large  estabhshment  the  head  cashier  has  under  him  a  num- 
ber of  assistants,  each  of  whom  is  designated  by  a  number  or 
letter,  and  is  in  charge  of  the  receipts  of  a  section  of  the  store. 
The  assistant's  number  or  letter  is  stamped  on  each  sales  sHp 
handled  by  him.  At  the  beginning  of  the  day  he  is  provided  with 
a  fixed  change  fund  and  at  the  end  of  the  day  he  turns  in  the  day's 
receipts  and  the  fund  received  for  making  change.  A  record  is 
then  prepared  of  the  total  received  from  each  cashier,  which 
total  is  proved  with  the  amount  of  the  sales  slips  he  has  handled. 

At  regular  intervals — in  some  stores  as  frequently  as  six  times 
daily— the  copies  of  the  sales  slips  are  sent  to  the  sales  audit  de- 
partment to  be  summarized  as  to  cash,  charge,  or  C.O.D.  sales. 
Many  large  establishments  know  a  few  minutes  after  the  closing 
hour  the  total  of  the  day's  business,  this  total  being,  of  course, 
subject  to  minor  adjustments  for  missing  sales  slips,  correction  of 
errors,  etc. 


400  ACCOUNTING— THEORY  AND  PRACTICE 

The  sales  slips  are  summarized  by  departments  with  subtotals 
for  the  salespersons.  The  subtotals  are  proved  with  the  tally 
sheets,  where  these  are  prepared;  otherwise  with  the  total  sales 
shown  on  the  third  copies  of  each  clerk's  sales  slip.  While  mak- 
ing this  proof  it  is  customary  to  account  for  the  serial  numbers 
printed  on  the  sales  slips,  any  missing  sales  slips  being  listed  and 
traced  or  the  reason  for  their  disappearance  investigated. 

Sales,  Subject  to  Alteration  of  the  Goods 

When  the  goods  sold  are  to  be  dehvered  at  a  later  date,  as 
when  alterations  are  made  before  delivery,  it  is  customary,  if  the 
customer  does  not  have  a  charge  account,  to  request  a  deposit  at 
the  time  of  making  the  sale.  The  audit  of  the  sales  slips  must 
include  a  segregation  and  a  summary  of  such  deposits.  The  de- 
posits are  recorded  in  a  ledger  account,  which  is  treated  as  a 
deposit  hability  until  the  sale  is  completed,  at  which  time  a  sales 
slip  is  made  out  for  the  entire  transaction. 

C.O.D.  Sales 

It  is  the  duty  of  the  sales  audit  department  not  only  to  pre- 
pare totals  of  the  sales  by  departments  and  by  salespersons,  but 
to  prove  the  summary  of  the  sales  slips  with  the  cash  received 
for  cash  sales  and  the  entries  made  in  the  C.O.D.  records  for  the 
C.O.D.  sales.  The  accounting  for  the  C.O.D,  sales  in  establish- 
ments where  such  sales  are  numerous,  requires  the  observance  of  a 
definite  procedure.  If  collections  were  invariably  made  at  the 
time  of  the  delivery  of  the  goods,  which  is  usually  on  the  day 
following  the  sale,  no  difficulty  would  arise.  Some  of  the  C.O.D. 
items,  however,  may  not  be  collected  for  several  days,  others 
may  be  transferred  to  charge  accounts,  and  others  again  may  be 
canceled  through  the  return  of  the  merchandise  to  stock. 

It  is  not  customary  to  open  ledger  accounts  for  C.O.D. 
transactions.  Instead,  individual  columnar  books  are  used  to 
record  these  items  either  alphabetically  or  numerically  (if  such 
sales  are  numbered  consecutively).    These  books  are  ruled  with 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING    4OI 

columns  to  indicate  how  settlement  is  made.  Periodically,  and 
as  a  rule  at  the  close  of  each  month,  the  open  items  are  listed  and 
the  aggregate  is  proved  with  the  general  ledger  control  account. 
In  many  stores  the  C.O.D.  records  are  seldom  in  balance,  due 
in  some  cases  to  the  fact  that  the  keeping  of  the  records  is  a 
part  of  the  work  of  a  receiving  or  delivery  clerk  and  is  sacrificed 
to  his  principal  duties.  Notwithstanding  this  fact  the  C.O.D. 
records  are  generally  kept  in  the  delivery  department  so  that  the 
drivers  can  readily  secure  information  and  make  reports. 

Billing  Accounts  Receivable 

The  charge  accounts  of  a  department  store  are  handled  in 
practically  the  same  manner  as  those  of  any  mercantile  estab- 
lishment. The  well-managed  department  stores,  however, 
organize  their  billing  departments  so  that  all  invoices  covering 
the  sales  of  the  entire  month  are  in  the  mail  by  midnight  of  the 
last  day  of  the  month.  In  some  stores  bookkeeping  machines 
are  used  to  prepare  the  invoices  and  ledger  sheets  in  one  opera- 
tion. By  means  of  tabulating  devices  these  machines  make 
possible  a  daily  proof  of  the  items  entered  on  the  invoice  and 
sheets  and  thus  insure  the  automatic  balancing  of  the  ledgers 
with  the  controls  at  the  close  of  the  month. 

Cash  Records 

The  majority  of  the  cash  receipts  come  from  the  following 
principal  sources: 

1.  Cash  sales 

2.  Collections  of  customers'  accounts  receivable 

3.  Collection  of  C.O.D.  sales 

Miscellaneous  receipts  may  come  from  many  sources,  ranging 
from  the  sale  of  drinking  cups  and  the  income  from  weighing 
machines  to  the  operation  of  a  post-office  and  interest  earned  on 
notes  receivable. 

vol-     MI — 36 


402  ACCOUNTING— THEORY  AND  PRACTICE 

The  handling  of  these  miscellaneous  items  of  income  does  not 
raise  any  accounting  problems  which  are  difficult  to  solve. 

The  general  cash  records  are  very  simple.  Receipts  and  dis- 
bursements are  kept  on  separate  sheets.  In  the  larger  stores  the 
receiving  cashiers  keep  the  record  of  the  cash  received  from  ac- 
counts receivable  separate  from  that  of  items  going  into  the  general 
ledger  by  preparing  separate  blotters  for  it,  divided  into  sections 
to  facilitate  posting  to  the  various  ledgers.  In  other  establish- 
ments the  receipts  from  accounts  receivable  are  recorded  in 
duplicate  on  cash  slips  or  tickets,  one  for  each  item  as  received. 
After  the  daily  proof,  the  slips  for  the  accounts  receivable  ledgers 
are  separated  from  those  for  the  general  ledger,  the  slips  for  the 
accounts  receivable  ledgers  being  sent  to  the  bookkeeping  ma- 
chine operators  to  be  typed,  while  those  for  the  general  ledger 
items  are  sent  to  the  cashier  to  be  entered  in  the  cash  receipts 
books  in  detail.  Only  the  totals  of  the  day's  cash  sales  and  the 
collections  of  accoimts  receivable  are  entered  in  the  cash  receipts 
book. 

The  cash  disbursements  representing  settlements  of  accounts 
payable  are  usually  summarized  in  sections  corresponding  with 
the  accounts  payable  ledger  controls.  These  disbursements  are 
taken  from  duplicate  loose-leaf  check  stubs  which  when  filed  are 
a  part  of  the  cash  records.  The  miscellaneous  disbursements  are 
either  recorded  on  a  separate  series  of  duplicate  loose-leaf  check 
stubs  or  noted  in  a  sundry  column  on  the  check  stub,  if  the  stub 
used  is  of  the  same  series  as  that  for  the  accounts  payable  checks. 
The  daily  totals  of  the  accounts  payable  checks  and  the  details  of 
the  other  checks  are  entered  in  the  general  cash  disbursements  book. 

Departmental  Merchandise  Accounts 

Special  consideration  must  be  given  to  the  records  of  the  mer- 
chandise purchases,  as  the  figures  prepared  from  these  records 
give  the  information  which  enables  the  management  to  know  in 
advance  whether  the  merchandise  purchased  will  yield  sufficient 
gross  profit  if  sold  at  the  marked  prices.    The  cost  of  purchases 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING    403 

figures  entered  on  these  records  are  automatically  proved,  being 
offset  by  credits  of  equal  amount  to  accounts  payable.  The 
selling  figures,  however,  have  no  offsetting  entries,  and  therefore 
they  require  close  checking  to  determine  their  accuracy.  As  an 
error  of  a  slight  amount  in  the  unit  selling  price  may  materially 
affect  the  book  inventory  of  a  department,  it  is  highly  important 
to  extend  and  summarize  correctly  the  figures  placed  on  the 
invoices  to  represent  the  selling  prices. 

The  invoices  covering  merchandise  purchases,  after  being 
checked  by  the  receiving  department,  are  sent  to  the  buyer  for 
his  approval.  The  buyer  marks  next  to  each  lot  the  unit  sales 
price,  which  is  subsequently  entered  on  the  tag  attached  to  the 
merchandise.  The  invoices  are  then  sent  to  the  accounting 
department  where  extensions  of  the  selling  prices  are  made  in 
red  ink  and  the  extensions  of  the  cost  prices  and  the  footings  of 
the  invoices,  both  as  to  cost  and  selling,  are  verified.  The  in^ 
voices  are  entered  either  on  a  columnar  record  showing  the  cost 
and  selling  price,  freight,  and  miscellaneous  charges  for  each 
department,  or  on  separate  sheets  for  each  department.  From 
this  record  monthly  figures  are  compiled  showing  the  purchases 
of  each  department. 

"  Retail  "  System  of  Pricing  Inventories 

The  inventory  records  of  a  department  store  are  prepared  in 
accordance  with  a  method  commonly  referred  to  as  the  "retail 
system."  In  the  operation  of  this  system  the  inventory  prices 
are  obtained  by  deducting  from  the  marked  selling  prices  a 
percentage  referred  to  as  the  "mark-on,"  or  "mark-up."  The 
"mark-on"  is  secured  by  dividing  the  total  of  the  selling  prices 
of  the  merchandise  available  for  sale  during  a  given  period  into 
the  total  of  the  amounts  added  to  the  cost  prices  of  such  mer- 
chandise to  make  up  the  marked  selling  price.  The  percentage 
thus  figured  will  here  be  referred  to  as  "mark-on."  The  method 
of  figuring  this  mark-on  is  outlined  and  illustrated  in  more  detail 
in  the  following  pages. 


404  ACCOUNTING— THEORY  AND  PRACTICE 

The  expression  ''mark-up"  is  generally  used  to  designate  the 
amount  added  to  the  current  selling  price  to  make  it  conform  to 
the  enhanced  market  value  of  similar  merchandise.  The  "mark- 
down"  is  the  amount  deducted  from  the  current  selling  price 
of  an  article  for  the  purpose  of  reducing  the  selling  price  to  the 
existing  market  or  for  the  purpose  of  clearing  out  merchandise 
purchased  for  sale  in  previous  seasons.  With  these  definitions 
in  mind,  it  can  be  seen  that  it  is  preferable  to  restrict  the  use 
of  the  expression  "mark-up"  to  the  increases  of  marked  selhng 
prices. 

A  consideration  of  the  unusual  business  conditions  prevaiUng 
during  the  years  1918  to  1921  inclusive,  will  make  apparent 
some  of  the  merits  of  the  retail  system  for  arriving  at  inventory 
figures.  Often  during  these  years  the  old  rule  of  "cost  or  rnar- 
ket,  whichever  is  lower"  did  not  apply,  as  the  cost  in  some  cases 
was  higher  than  the  prevailing  market,  while  the  market  (i.e., 
the  price  at  which  fresh  merchandise  could  be  purchased)  was 
almost  as  high  as  the  retail  selling  price.  Whereas  manufacturing 
and  mercantile  establishments  not  operating  on  the  retail  system 
were  faced  with  a  difiicult  problem  in  the  valuing  of  inventories, 
the  department  stores  using  the  system  solved  the  problem  almost 
automatically.  To  illustrate  the  advantages  of  the  method, 
assume  that  an  article  costs  60  cents,  and  the  original  price  at 
which  it  is  marked  to  be  sold  is  $1.  Three  months  later,  at  the 
close  of  the  fiscal  year,  the  selling  price  of  this  article  has  been 
marked  down  to,  say,  65  cents,  while  the  prevailing  wholesale 
price  is  55  cents.  Under  the  retail  method  the  percentage  to 
be  taken  off  for  inventory  valuation  in  this  case  is  40%,  as 
determined  from  the  original  cost  and  selling  price.  The  article 
would  now  be  listed  for  inventory  purposes  at  a  selling  price  of 
65  cents,  and  a  deduction  of  40%  would  make  the  present  inven- 
tory price  39  cents.  This  would  enable  the  establishment  to 
make  a  profit  in  the  coming  period  and  to  charge  ofif  the  estimated 
loss  of  21  cents  to  the  period  just  ended. 

To  illustrate  the  process  used  by  the  majority  of  the  well- 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING    405 

managed  department  stores  to  obtain  the  mark-on,  take   the 
following  figures  for  one  department : 

Department  A 

Cost  Selling 

Inventory  June  30, 192 1 $100,000.00  $200,000.00 

Purchases: 

July 50,000.00  100,000.00 

August 50,000.00  90,000.00 

September 50,000.00  95,000.00 

October 50,000.00  90,000.00 

November 50,000.00  90,000.00 

December 50,000.00  85,000.00 

$400,000.00    $750,000.00 
Mark-ups  during  period 50,000.00 

$800,000.00 

In  this  case  the  mark-on  would  be  50%,  or  the  figure  required 
to  reduce  $800,000  to  $400,000.  The  mark-downs  for  the  same 
period  might  have  been  $100,000,  but  this  item  is  not  considered 
in  arriving  at  the  percentage  to  be  deducted  from  the  selling  price 
to  reduce  it  to  an  inventory  "cost." 

It  may  be  suggested  that  in  arriving  at  the  mark-on  the 
amount  of  mark-downs  should  be  deducted  from  the  marked 
selling  figure.  If  this  were  done,  however,  it  would  give  in  the 
majority  of  cases  an  inventory  figure  higher  than  cost.  For 
instance,  in  taking  the  figures  in  the  preceding  illustration,  we 
have : 

Selling $800,000.00 

Less:  Mark-downs 100,000.00    $700,000.00 

Amount  added  to  the  $400,000  cost $300,000.00 

Mark-on 42  6/7% 

Assuming  sales  of  $350,000,  which  include  75%  of  the  mer- 
chandise marked  down  as  well  as  an  equal  percentage  of  that 
marked  up,  we  have: 


406  ACCOUNTING— THEORY  AND  PRACTICE 

Merchandise  available  for  sale,  considered  at  sell- 
ing prices $700,000.00 

Less:  Sales 350,000.00 

Inventory  at  selling  prices $350,000.00 

Less:  Mark-on  (42  6/7%) 150,000.00 

Or  an  inventory  valuation  of $200,000.00 

However,  if  the  original  cost  of  the  merchandise  on  hand  is 
calculated  we  find  that  the  cost  is  lower  than  the  above  figure. 

Inventory,  as  taken  at  selling  prices $350,000.00 

Add:  To  eliminate  25%  of  the  $100,000  mark- 
downs  still  in  stock 25,000.00 

Total $375,000.00 

Deduct:  To  eliminate  25%  of  the  $50,000  mark- 
ups still  in  stock 1 2,500.00 

Stock  on  hand  at  original  marked  prices $362,500.00 

Original  mark-on  ($750,000   —  $400,000   =  $350,000),  or  46  2/3% 

The  cost  price  of  merchandise  on  hand  would  be,  therefore, 
$i93,333-33>  i-e.,  $362,500  -  $169,166.67  (362,500  X  46  2/3%). 

As  it  is  assumed  in  the  above  figures  that  the  sales  of  $350,000 
included  75%  of  the  merchandise  marked  down  and  that  the 
total  of  the  mark-downs  was  $100,000,  it  follows  that  such  sales 
must  have  included  merchandise  reduced  to  the  extent  of  $75,000. 
The  merchandise  still  on  hand,  therefore,  must  include  articles 
the  prices  of  which  in  the  aggregate  have  been  reduced  $25,000, 
being  the  balance  of  the  total  mark-downs  of  $100,000.  Similar 
reasoning  proves  that  the  sales  included  $37,500  of  the  mark-ups, 
while  merchandise  on  hand  carried  in  the  aggregate  mark-ups  of 
$12,500. 

It  may  be  suggested  that  no  consideration  should  be  given  to 
either  the  mark-up  or  the  mark-down  in  arriving  at  the  mark-on, 
but  this  practice  may  also  lead  to  an  inventory  figure  higher  than 
cost.  Using  the  same  figure  and  assuming  that  the  sales  of 
$350,000  include  75%  of  the  merchandise  marked  down  and  25% 
of  the  merchandise  marked  up,  we  have: 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING     407 

Inventory  at  selling  price $350,000.00 

Less:  Mark-on     (46  2/3%) ^(>2„i2>i-i2> 

Inventory  valuation $186,666.67 

The  original  cost  price  of  the  merchandise  on  hand,  however, 
would  be  $180,000,  which  is  lower  than  the  inventory.  This 
original  cost  price  is  figured  as  follows : 

Inventory,  as  taken  at  selling  price $350,000.00 

Add:  To  eliminate  mark-downs  still  in  stock, 

25%  of  $100,000 25,000.00 

$375,000.00 
Deduct:  To  eliminate  mark-ups  still  in  stock, 

75%  of  $50,000 37,500.00 

Stock  on  hand,  at  original  marked  price $337,500.00 

Less:  Original  mark-on  (46  2/3%) $157,500.00 

Or  an  inventory  valuation  of $180,000.00 

The  Problem  of  Varying  Mark-Ons  in  the  Same  Department 

In  connection  with  the  retail  system  there  are  many  interest- 
ing problems,  which  require  study  and  close  analysis  in  order 
that  the  accountant  may  avoid  making  errors  of  principle.  For 
instance,  the  merchandise  of  one  department  may  consist  of  two 
or  more  large  classes  with  varying  percentages  of  mark-on.  Un- 
less the  sales  for  the  various  classes  are  in  proportion  to  the  pur- 
chases, the  inventory  valuations  may  be  either  too  high  or  too 
low.    To  illustrate : 

Class  A  Class  B 

At  Cost       At  Selling  At  Cost        At  Selling 

Purchases $10,000.00    $15,000.00  $10,000.00    $20,000.00 

Sales 8,000.00       12,000.00  1,000.00        2,000.00 

$  2,000.00    $  3,000.00  $  9,000.00    $18,000.00 

Mark-on 7,7,  1/3%  50% 


408  ACCOUNTING— THEORY  AND  PRACTICE 

The  combined  figures  calculated  by  the  method  of  the  retail 
system  would  give: 

Purchases,  at  cost $20,000.00 

Purchases,  at  selling $35,000.00 

Mark-on 42  6/7% 

Inventory  class  A,  at  selling $  3,000.00 

Inventory  class  B,  at  selling 18,000.00 

$21,000.00 
Mark-on  (42  6/7%) 9,000.00 

Inventory  valuation $12,000.00 


Whereas  the  actual  inventory  is  $11,000  ($2,000  class  A  and 
$9,000  class  B). 

Where  such  a  condition  exists  and  the  amounts  involved 
are  large,  the  solution  of  the  problem  is  to  divide  the  depart- 
ment into  two  units,  keeping  separate  stock  figures  for  each 
unit. 

Reconciling  Book  and  Physical  Inventories 

It  would  seem  at  first  glance  that  the  physical  inventory,  which 
is  taken  at  regular  intervals  and  listed  at  selling  prices,  could  be 
easily  reconciled  with  the  amounts  appearing  in  the  book  inven- 
tory records,  which  are  also  at  selling  prices.  Such,  however,  is 
not  the  case.  Many  departments  show  large  differences,  either 
over  or  short.  For  instance,  shortages  are  sometimes  accounted 
for  by  losses  through  shrinkage  in  yard  goods  or  by  differences 
due  to  special  prices  being  made  at  the  time  of  the  sale  on  dozen 
or  gross  lots  when  the  merchandise  has  been  marked  to  sell  as  an 
article.  In  many  instances,  however,  the  differences  are  not 
caused  by  shrinkages  or  differences  in  price  or  other  known 
causes,  but  are  due  to  violation  of  the  rules  by  the  buyers.  The 
prices  may  be  manipulated  by  omitting  to  report  mark-ups  or 
mark-downs  or  by  deliberate  alteration  of  the  marked  prices 
without  notice  to  the  office.     Investigation  of  large  inventory 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING    409 

differences  in  certain  departments  generally  reveals  the  fact  that 
such  differences  are  due  to  changes  in  the  marked  selling  prices 
without  reporting  such  changes  to  the  office.  When  the  buyer 
responsible  for  the  change  is  a  trusted  employee  and  is  operating 
his  department  at  a  profit  all  that  can  be  done  is  to  ask  him  to 
follow  instructions  in  the  future. 

The  Stock  Book 

The  stock  book  in  which  is  recorded  the  purchases,  sales, 
mark-downs,  etc.,  generally  has  columns  for  the  following 
information : 

Debits 

A.  Inventory  at  Beginning  of  Period  at  Selling  Prices 

B.  Purchases  at  Cost  Prices 

C.  Purchases  at  Selling  Prices 

D.  Mark-Ups 

E.  Transfers  from  Other  Departments  at  Selling  Prices 

F.  Returned  Sales 

Credits 

G.  Returned  Purchases  at  Cost 
H.   Returned  Purchases  at  Selling 
I.     Sales 

J.     Mark-Downs 

K.   Transfers  to  Other  Departments  at  Selling  Prices 
L.    Merchandise  Charged  to  Operating  Expenses 
M.  Inventory  at  End  of  Period  at  Selling  Prices 

The  sum  of  all  the  debits,  exclusive  of  the  purchases  at  cost, 
less  the  sum  of  all  the  credits,  exclusive  of  returned  purchases  at 
cost  and  of  inventory  at  the  end  of  the  period  at  selling  prices, 
gives  the  book  inventory  at  its  selling  price  or 

(A-HC-t-D-hE-t-F)  -(H  -t-I-hJ+K-l-L)  -M 


410  ACCOUNTING— THEORY  AND  PRACTICE 

"  Periodizing  "  Inventories 

Some  stores  have  adopted  a  plan  by  which  the  physical  in 
ventories  are  what  is  termed  "periodized,"  to  ascertain  the  length 
of  time  the  merchandise  has  been  in  stock.  This  is  accomplished 
by  placing  on  the  price  tag  at  the  time  of  marking  the  selling 
price  a  mark  whicft  is  referred  to  as  a  "  season  letter."  The  season 
letters  indicate  the  period  during  which  the  merchandise  was 
purchased.  When  the  inventory  is  taken,  the  letters  on  the 
tags  are  entered  on  the  inventory  sheets  and  the  amounts  are 
extended  in  separate  columns  provided  for  each  active  season 
letter.  For  instance,  the  amount  of  the  merchandise  on  hand 
in  one  department  may  be  simimarized  as  follows: 

Season 

Letter 

D      Purchases  during   first    half  1919 $     137.00 

E  "  "     second  half  1 919 73400 

F  "  "       first    half  1920 1,693.00 

G  "  "     second  half  1920 3,149.00 

H  "  "        first    half  1921 18,739.00 

I  "  "     second  half  1921 43,182.00 

$67,634.00 

The  periodizing  of  the  merchandise  on  hand  enables  the  mer- 
chandise manager  to  determine  the  nature  and  the  amount  of 
the  old  merchandise  carried  in  each  department  and  to  make 
arrangements  for  the  disposal  of  obsolete  items. 

Turnover 

The  turnover  represents  the  number  of  times  the  average 
stock  is  sold  during  a  given  period  and  the  rate  of  turnover  is  a 
guide  to  the  management  as  to  whether  the  merchandise  of  a 
department  is  moving  as  fast  as  in  similar  periods  in  previous 
years.  The  turnover  is  calculated  by  dividing  the  average  in- 
ventory carried  during  a  given  period  taken  at  selling  prices,  into 
the  sales  for  that  period.     Assuming  sales  of  $150,000  for  the  6 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING    411 

months  ending  June  30,  19-,  and  the  following  inventories  at 
selling  prices : 

January  i $  70,000.00 

January  31 -.  . . .  65,000.00 

February  28 45,000.00 

March  31 50,000.00 

April  30 55,000.00 

May  31 65,000.00 

June  30 70,000.0c 

7  )  $420,000.00 

Average  inventory  at  selling $  60,000.00 

This  would  give  a  turnover  of  2  1/2  ($150,000  -^  $60,000). 

If  the  figures  used  for  the  inventories  are  at  cost  prices,  the 
figures  for  the  sales  would  be  taken  at  the  cost  of  sales  price. 

Where  there  are  no  monthly  inventory  figures  available,  an 
average  of  the  inventories  at  the  beginning  and  the  end  of  the 
period  may  be  used.  This  average,  however,  will  not  always  be 
representative  of  the  stock  carried  by  the  department  for  the 
entire  period,  as  it  is  likely  that  the  stock  on  hand  at  intervals 
during  the  period  may  be  considerably  larger  or  smaller  than  that 
carried  at  the  beginning  or  end  of  the  period.  Some  estabhsh- 
ments  go  to  the  extreme  of  using  an  average  of  the  inventories 
at  the  close  of  each  week.  If  monthly  book  inventory  figures  are 
available  it  should  not  be  necessary  to  prepare  weekly  figures,  as 
the  monthly  figures  are  sufficiently  representative  of  the  average 
stock  to  give  fairly  accurate  turnover  figures. 

Alteration  Departments 

Some  stores  form  separate  departments  of  rooms  in  which 
suits,  millinery,  upholstery,  etc.,  are  altered,  and  make  charges 
for  alterations.  In  some  cases  articles  which  cannot  be  obtained 
easily  are  manufactured  by  these  alteration  departments,  for 
which  work  a  special  price  is  asked.  The  alteration  charges 
and  the  charges  made  for  the  articles  specially  manufactured 
make  up  the  sales  of  the  alteration  department. 


412  ACCOUNTING— THEORY  AND  PRACTICE 

Complete  records  are  kept  of  the  operating  costs  of  these 
departments,  generally  on  a  job  basis.  The  costs  and  the  sales 
figures  are  as  a  rule  recorded  in  the  stock  book  used  to  prepare 
the  book  inventory  figures  for  the  regular  selUng  departments, 
the  pay-roll  figures  being  entered  in  special  coliunns.  The  in- 
ventory figures  for  these  alteration  departments  are  not  prepared 
in  the  same  manner  as  those  for  the  regular  selling  departments. 
The  inventories,  except  for  the  value  of  a  few  partially  completed 
jobs,  consist  of  materials  and  supplies  to  be  used  for  alterations. 
These  materials  and  supplies  are  valued  at  their  cost  prices. 
These  inventories  are  comparatively  small  in  amount. 

The  principal  reason  for  the  separation  of  the  "alteration" 
figures,  as  they  are  called,  from  the  regular  suit,  milHnery,  etc.,  or 
''straight  selling  department"  figures  is  that  their  inclusion 
makes  it  impossible  to  prepare  dependable  mark-on  figures.  The 
percentage  of  mark-on  or  gross  profit  for  the  alteration  work 
varies  to  such  an  extent  that  the  combination  of  the  alteration 
figures  with  the  straight  selling  figures  gives  a  result  which  at 
inventory  time  does  not  represent  the  true  mark-on  of  an  inven- 
tory of  more  than,  say,  95%  of  straight  selling  merchandise  and 
probably  less  than  5%  of  alteration  merchandise  or  supplies. 

Distribution  of  Expenses 

Expenses  are  generally  entered  in  a  columnar  record  in  order 
to  facilitate  their  distribution  to  various  accounts.  The  pay- 
rolls are  distributed  to  the  selling  or  to  the  expense  departments 
so  as  to  provide  subtotals  for  these  divisions.  Almost  every 
department  store  prepares  monthly  profit  and  loss  statements 
with  the  expenses  distributed  to  the  departments  so  as  to  give 
a  net  profit  or  loss  figure  for  each.  In  this  statement  the  ex- 
penses are  grouped  according  to  functions,  as  illustrated  on 
pages  418-422. 

There  is  much  difference  of  opinion  as  to  the  extent  to  which 
department  store  expenses  should  be  distributed  over  depart- 
ments.   Some  estabUshments  distribute  all  expenses  in  this  way, 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING    413 

while  others  Hmit  the  distribution  to  the  allocation  of  the  expenses 
directly  chargeable  to  departments,  as,  for  instance: 

1.  Salaries  and  expenses  of  buyers. 

2.  Salaries  of  salespersons. 

3.  Salaries  of  other  departmental  employees. 

4.  Miscellaneous  supplies  and  expenses  incurred  exclusively 

for  any  department. 

When  it  is  considered  that  many  departments  undoubtedly 
are  benefited  through  their  location  or  because  the  prices  which 
they  charge  for  the  articles  are  due  in  a  certain  measure  to  heavy 
expenses  incurred  for  certain  store  operations,  such  as  dehvery 
in  the  case  of  furniture  or  household  goods,  it  can  be  seen  that  it 
is  hardly  fair  to  distribute  all  expenses  other  than  direct  depart- 
mental expenses  on  a  sales  basis.  On  the  other  hand,  too  much 
significance  should  not  be  placed  on  the  figures  obtained  when  the 
various  expenses  are  distributed  to  the  departments  on  a  more  or 
less  arbitrary  basis.  It  is  better  to  consider  that  these  final  re- 
sults have  value  solely  for  the  purpose  of  comparison  with  similar 
results  of  the  same  department  for  other  periods.  There  is,  for 
instance,  little  or  no  basis  for  comparing  the  results  of  a  depart- 
ment on  the  first  floor  selling  for  cash  many  small  articles  re- 
quiring comparatively  few  deliveries,  with  the  results  of  a  depart- 
ment, say  on  the  sixth  floor,  making  many  charge  sales,  all  of 
which  must  be  dehvered. 

The  question  of  rent  distribution  is  a  problem  in  itself.  In  a 
store  with  six  selling  floors,  the  distribution  of  rent  might  be  as 

follows: 

First    Floor 40% 

Second  "    20 

Third  "    10 

Fourth  "    10 

Fifth  "    10 

Sixth  "    10 

Even  when  all  of  the  department  heads  agree  that  this  divi- 
sion is  equitable  and  that  the  rent  on  each  floor  should  be  dis- 


414  ACCOUNTING— THEORY  AND  PRACTICE 

tributed  on  the  basis  of  the  floor  space,  the  question  of  the  com- 
parative advantages  of  certain  locations  on  a  given  floor  remains 
to  be  settled.  For  instance,  the  departments  to  which  the  main 
entrance  leads  and  departments  in  front  of  the  elevators  are 
advantageously  located.  Certain  adjustments  must  be  made  so 
that  these  favored  departments  will  be  charged  a  higher  rental 
than  other  departments.  In  some  establishments  charges  for 
tables  located  in  the  main  aisles  and  used  for  special  sales,  are 
allocated  to  various  departments.  This  practice  necessitates 
the  use  of  special  records  to  adjust  the  rent  figures.  The  average 
store,  however,  does  not  consider  it  worth  while  to  make  a  special 
distribution  for  this  purpose. 

The  other  expenses  are  distributed  in  some  cases  as  follows: 

Maintenance  and  operation  of  the  plant,  on  the  basis  of  the 

floor  space  occupied  by  each  department. 
Receiving  expense,  on  the  basis  of  the  cost  prices  of  the 

merchandise  purchased  for  each  department. 
Delivery  expense,  on  the  basis  of  packages  delivered. 
Advertising,  on  the  basis  of  advertising  space  used  by  each 

department.     Headings  and  general  advertising  on  the 

basis  of  sales. 
Buying  other  than  direct  departmental,  on  the  basis  of 

purchases  made  by  each  department. 
Selling  expense  other  than  direct  departmental,  on  the 

basis  of  the  sales  of  each  department. 
Administrative  and  general,  on  the  basis  of  the  sales  of  each 

department. 

Cash  Discounts 

Some  store  managements  allocate  to  each  department  the 
cash  discounts  which  would  be  earned  if  all  the  discounts  allowed 
on  the  purchases  of  that  department  were  taken.  The  purchases 
of  some  departments  are  practically  net,  those  of  other  depart- 
ments are  subject  to  large  cash  discounts.    This  allocation  makes 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING    415 

possible  a  comparison  of  the  results  of  the  departments  based  on 
the  net  cash  prices  which  should  be  paid  for  the  merchandise 
purchased. 

Another  method  of  handling  the  departmental  cash  discount  is 
to  assume  that  each  department  should  earn  an  arbitrary  discount 
on  all  purchases,  generally  6%.  As  each  invoice  is  entered,  the 
department  is  charged  with  the  difference  between  the  discount 
at  the  6%  rate  and  that  at  the  rate  of  discount  appearing  on  the 
invoice.  For  instance,  an  invoice  for  $i,ooo,  terms  2%  lo  days, 
net  6o  days,  would  have  4%  (6%  —  2%)  or  $40  added,  making 
a  charge  to  the  department  for  the  purchase  of  $1,040. 

Where  this  method  is  used,  such  discounts  should  be 
eliminated  from  the  departmental  purchase  figures  when  the 
percentages  of  mark-ons  are  prepared  for  inventory  valuations. 

The  earnings  through  cash  discounts  are  as  a  rule  the  result 
of  a  sufficiency  of  invested  or  borrowed  capital,  generally  the 
latter.  It  is  therefore  considered  equitable  by  certain  store 
executives  to  make  a  charge  to  the  departments  for  interest  on 
the  amounts  invested  in  the  department.  This  is  generally  done 
by  charging  each  department,  say,  6%  per  annum  on  the  average 
stock  carried  by  the  department.  The  cost  of  the  fixtures  and 
equipment  used  exclusively  by  a  department  is  sometimes  added 
to  the  amount  of  the  average  stock  when  making  this  interest 
charge. 

Balance  Sheet 

The  balance  sheet  of  a  department  store  does  not  differ  from 
that  of  any  mercantile  establishment.  After  the  assets  are 
evaluated,  and  the  liabilities  determined,  there  are  no  special 
problems  in  assembling  the  figures.  The  only  item  in  the  balance 
sheet  given  below  which  might  require  explanation  is  the  Cash 
Value  of  Firm  Life  Insurance. 

It  is  the  policy  of  many  large  enterprises  to  secure  life  in- 
surance for  substantial  amounts  covering  the  lives  of  some  of  the 
executives  whose  services  are  especially  valuable  in  the  operation 


41 6       ACCOUNTING— THEORY  AND  PRACTICE 

of  the  business.  This  is  done  with  the  thought  that  the  sudden 
death  of  one  of  these  executives  might  to  a  certain  extent  disrupt 
the  organization  and  cause  a  loss.  The  cash  surrender  value  of 
such  insurance  policies  is  carried  as  an  asset.  At  the  end  of  each 
year  these  values  are  adjusted.  The  increase  in  the  cash  sur- 
render value  is  added  to  the  asset  account.  The  difference  be- 
tween the  premium  paid  and  the  increase  in  the  cash  surrender 
value  is  considered  a  general  expense  item. 

The  Jones  and  Brown  Company,  Inc. 

Balance  Sheet 

December  31,  19- 

Assets 

Cash  on  Hand  and  in  Banks $    185,320.75 

United  States  Victory  Notes,  $5,000  par. .  4,630.80 

Notes  Receivable,  Customers 15,190.00 

Accounts  Receivable,  Net  of  Reserve.  .  . .  318,194.80 

Merchandise,  at  cost  or  less 1,382,468.40 

Total  Current  Assets $1,905,804.75 

Supplies $      25,192.30 

Prepaid  Insurance,  Interest,  etc 17,341.40 

Total  Deferred  Charges 42,533.70 

Securities  of  Other  Companies $     40,190.30 

Notes  Receivable,  Other  than  customer's . .  28,340.70 

Cash  Value  of  Firm  Life  Insurance 16,189.20 

Total  Other  Assets 84,720.20 

Land $380,194.00 

Buildings,  Net  of  Depreciation 789,347.30 

Store  Fixtures,  Net  of  Depreciation 291,410.80 

Delivery  Equipment,  Net  of  Depreciation .  57,300.10 

Total  Plant  and  Equipment 1,518,252.20 

Total  Assets $3,SSi>3io-85 


PRINCIPLES  OP  DEPARTMENT  STORE  ACCOUNTING    417 

Liahilities 

Notes  Payable $    325,000.00 

Accounts  Payable 418,706.50 

Accrued  Salaries,  Expenses,  etc 54,625.30 

Income  and  Excess  Profits  Taxes 95,310.00 


Total  Current  Liabilities $    893,641.80 

Capital 

Capital  Stock,  150,000  Shares $1,500,000.00 

Surplus,  June  30,  19 — . . .    .     $967,258.25 
Profits  for  six  months  to  De- 
cember 31,  19 — 190,410.80      1,157,669.05      2,657,669.05 


Total  Liabilities  and  Capital. $3,551,310.85 


Earnings  and  Expenses 

The  statement  of  earnings  and  expenses  of  a  department 
store  should  give  information  which  will  enable  the  management 
to  determine  not  only  the  results  of  the  business,  but  whether  the 
store  as  a  whole  is  being  operated  efficiently  and  economically. 
In  some  store  statements  a  few  expense  accounts  show  such  large 
amounts  and  combine  so  many  expenses  that  their  study  reveals 
nothing  of  assistance  to  the  management  without  a  detailed 
analysis.  On  the  other  hand,  other  store  classifications  include 
hundreds  of  accounts  making  the  statement  of  earnings  and  ex- 
penses so  long  and  formidable  in  appearance,  that  the  executive 
feels  he  can  hardly  spare  the  time  necessary  for  its  perusal. 
In  preparing  a  statement  of  earnings  and  expenses  the  data 
should  be  so  arranged  that  the  executive  can  easily  interpret  the 
figures  and  through  their  use  make  plans  to  effect  economies  and 
to  increase  the  efficiency  of  the  organization. 

Though  much  has  been  done  during  the  last  four  or  five  years 
by  research  associations  and  by  associations  of  department  store 
accountants  to  standardize  department  store  accounts  and  their 
classifications,  these  associations  and  the  individual  accountants 

VOL.  Ill — 27 


41 8       ACCOUNTING— THEORY  AND  PRACTICE 

have  not  always  kept  in  mind  the  man  who  reads  or  should  read 
the  statement.  Where  it  is  evident  that  the  executive  is  not 
interested  in  or  cannot  understand  the  long  statement  provided, 
it  is  the  accountant's  duty  to  furnish  him  with  a  more  condensed 
form  as  a  guide  to  lead  him  gradually  to  use  the  full  statement. 
A  typical  statement  of  earnings  and  expenses  in  sHghtly 
condensed  form  is  given  below : 

The  Jones-Brown  Company,  Inc. 

Statement  of  Earnings  and  Expense 

For  the  Year  19- 

Sales $ 

Less:  Returns  and  Allowances 

Net  Sales $ 

Cost  of  Sales: 

Inventory  at  beginning  of  period $ 

Purchases — net  of  returns  and  allowances 

Freight,  Express,  and  Cartage  Inward 

Duties  on  Foreign  Purchases 

Alteration  Cost  (suits,  cloaks,  etc.) 

Total $ 

Less:  Inventory  at  end  of  period 

Cost  of  Sales 

Gross  Merchandise  Profit $ 


Buying  Expense: 
Salaries  and  Wages: 

Merchandise  Manager  and  Assistants $ . 

Buyers  and  Assistants 

Receiving  and  Working  Room 

Rentals  New  York  Office 

Supplies: 

Stationery  and  Printing $ . 

Other  Supplies 

Traveling  Expenses 

Postage,  Telephone,  and  Telegraph 

Miscellaneous  Expenses 


Total  Buying  Expense $ . 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING     419 

Selling  Expense: 
Salaries  and  Wages : 

Sales  Manager  and  Assistants $ 

Floor  Managers  and  Assistants 

Sales  Force 

Commissions 

Premiums 

Stockpeople 

Cashiers  and  Examiners 

Mail  Order  Department 

Adjustment  Bureau $ . . 

Supplies : 

Sales  Books $ 

Boxes 

Wrapping  Paper  and  Twine 

Tags  and  Tickets 

Miscellaneous 


Miscellaneous  Expenses 

Total  Selling  Expense 

Publicity : 

Salaries  and  Wages: 

Advertising  Manager  and  Assistant $. 

Decorators  and  Window  Dressers 

Others 


Advert- sing: 

Newspapers $ . 

Catalogues 

Circulars 

Other  Advertising 

Supplies: 

Stationery $ . 

Decorations 

Other 


Traveling  Expenses 

Postage,  Telephone,  and  Telegraph . 
Miscellaneous  Expenses 

Total  Publicity 


420  ACCOUNTING— THEORY  AND  PRACTICE 

Delivery  Expense: 
Salaries  and  Wages: 

Package  Collectors $ . . . . 

Shipping  Department 

Delivery  Department 

Express  and  Freight $ . .  . . 

Postage  on  Parcels 

Supplies: 

Packing  Supplies $ . . . . 

Gasoline,  Oil,  and  Grease 

Other 

Depreciation  on  Delivery  Equipment 

Insurance    on    Delivery    Equipment,    including 

Liability 

Repairs  to  Equipment 

Uniforms 

Bonds,  Surety  and  Fidelity 

Miscellaneous  Expenses 


Total  Delivery  Expense $ . 


Rent: 

Rental  of  Leased  Store  Buildings $ . 

Interest  on  Mortgage  on  Owned  Buildings .' 

Insurance  on  Owned  Buildings 

Repairs  of  Owned  Buildings 

Depreciation  on  Owned  Buildings 


Total  Rent . 


Maintenance  and  Operation  of  Plant: 
Salaries  and  Wages: 

Superintendent  and  Staff $ 

Watchmen 

Elevator  Operators 

Electricians 

Porters,  Cleaners,  etc 

Other $. 


PRINCIPLES  OF  DEPARTMENT  STORE  ACCOUNTING    42I 

Supplies: 

Operating $ 

Cleaning 

Other 


Insurance  on  Fixtures , 

Repairs  and  Replacements — Fixtures . .  . 

Depreciation  on  Fixtures , 

Heat,  Light,  and  Power: 

Salaries  and  Wages $ . 

Coal 

Water 

Supplies 

Repairs 

Depreciation  on  Plant 

Miscellaneous  Expenses 

Miscellaneous  Expenses * . 

Total  Maintenance  and  Operation  of  Plant 

General  and  Administrative  Expenses: 
Salaries  and  Wages : 

Executives  and  Assistants $ . 

Office 

Telephone  Operators 

Employment  Department 

Educational  and  Welfare 

Information  Bureau 

Other  General 

Supplies: 

Office $. 

Miscellaneous 

Traveling  Expenses 

Postage 

Telephone  and  Telegraph . . 

Insurance  on: 

Merchandise $. 

Public  Liability 

Surety  Bonds 

Other  (not  including  that  on  buildings  or  fix- 
tures)   


422  ACCOUNTING— THEORY  AND  PRACTICE 

Le^al  Fees 

Accountants'  Fees 

Contributions 

Gifts 

Reserved  for  Doubtful  Accounts 

Taxes  on  Merchandise 

Corporation  Tax 

Other  Taxes  (not  including  that  on  land  or  buildings) 

Miscellaneous  Expenses 

Total  General  and  Administrative  Expenses 


Total  Expenses $ . 


Net  Profit  on  Sales $ . 

Other  Income: 

Interest  on  Notes  Receivable $ 

Cash  Discounts  on  Purchases 

Miscellaneous  Store  Revenue 

Total  Income $ . 

Deductions  from  Income: 

Interest  on  Notes  Payable $ 

Provision  for  Federal  Income  Tax 


Profit  for  the  Period . 


Although  this  statement  of  earnings  and  expenses  is  quite 
lengthy,  anyone  familiar  with  the  subject  would  doubtless  sug- 
gest many  other  accounts.  It  has  been  the  aim  to  include  only 
those  accounts  which  are  necessary  to  indicate  the  principal 
expenses.  A  study  of  these  accounts  will  show  the  futility  of 
combining  any  of  them  if  they  are  to  furnish  the  information 
needed. 


CHAPTER  XII 

THE  ORGANIZATION  AND  ACCOUNTS  OF  A  PUBLIC 
ACCOUNTANT'S  OFFICE 

By  Albin  Russman 

Need  for  Records  and  System 

The  engineer,  lawyer,  or  other  professional  man  engaged  in 
solitary  practice  may  need  little  more  in  the  way  of  accounts  and 
account-keeping  than  such  records  as  may  be  kept  by  his  secre- 
tary. It  is  apparent,  however,  that  the  need  for  accounting 
records  and  systems  grows  with  the  number  of  persons  on  the 
staff  and  the  number  of  members  of  the  firm.  Indeed,  for  a  firm 
of  lawyers,  engineers,  or  accountants  to  attempt  to  carry  on  their 
work  without  an  adequate  system  of  accounts  and  the  organiza- 
tion of  their  activities  into  departments  under  responsible  heads 
would  be  as  futile  and  disastrous  as  for  any  other  type  of  under- 
taking. 

The  records  and  plan  of  organization  of  the  professional  man's 
office  are  often  makeshifts  planned  to  fit  the  needs  of  the  moment 
with  the  minimum  of  clerical  labor  rather  than  to  furnish  the 
members  of  the  firm  the  information  required  for  the  most 
economical  management.  Whatever  the  system  of  books  and 
records  adopted,  they  should  be  kept  on  the  double-entry  prin- 
ciple and  should  embody  such  features  of  cost  accoimting  as  may 
be  required  for  the  control  of  the  personnel  and  the  analysis  of 
the  charges  to  clients.  It  is  the  purpose  of  this  chapter  to  present 
the  fundamental  considerations  involved  in  such  a  system  and  to 
describe  the  organization  and  routine  of  a  public  accountant's  office. 

Before  proceeding  to  discuss  such  system  and  organization, 
a  brief  description  concerning  the  work  of  the  public  accountant 
may  be  of  help  in  understanding  these  matters. 

423 


424  ACCOUNTING— THEORY  AND  PRACTICE 

Branches  of  Accounting 

The  work  performed  by  the  pubhc  accountant  consists  of 
five  main  kinds  all  of  which  are  usually  carried  on  by  large  con- 
cerns and  in  some  of  which  smaller  firms  may  speciahze. 

Auditing.  This  work  consists  of  the  scrutiny  of  the  account- 
ing records  to  ascertain  their  correctness  prior  to  the  preparation 
of  balance  sheets  and  other  financial  statements. 

.  General  Accounting.  Under  this  heading  falls  such  work  as 
acting  in  an  advisory  capacity  for  a  business,  in  so  far  as  the 
accounts  and  the  financial  condition  thereof  are  concerned.  In 
the  event  of  corporate  reorganization,  merger,  or  liquidation  the 
services  of  the  public  accountant  are  indispensable. 

Cost  Accounting  and  Efficiency  Work.  Reorganizing  the 
accounting  system  of  a  manufacturing  business,  so  that  accurate 
manufacturing  statistics  can  be  obtained  and  cost  reports  pre- 
pared. The  cost  system  is  usually  made  a  part  of  the  general 
accounting  system. 

Investigations.  Public  accountants  are  often  engaged  by 
banking  or  other  financial  interests  to  examine  the  accounts  of  a 
company  in  connection  with  the  issuance  of  bonds  and  other 
securities,  or  the  purchase  or  sale  of  a  business  enterprise.  Other 
investigations  are  such  as  the  examination  for  legislative  commit- 
tees of  municipal,  state,  or  federal  government  accounts  by  pub- 
lic accountants. 

Tax  Reports.  The  preparation  of  government  tax  reports 
from  the  information  shown  on  the  financial  records  of  a  business, 
is  a  branch  of  public  accounting  that  has  assumed  much  impor- 
tance under  the  present  complex  scheme  of  taxation. 

In  addition  to  the  branches  of  public  accounting  mentioned 
above  the  accountant's  services  are  employed  in  other  fields  of 
work.  He  may  be  for  instance,  and  frequently  is,  called  upon  to 
act  as  arbitrator  in  disputes  about  financial  matters.  The  ad- 
judication of  wage  disputes  often  requires  the  services  of  an 
accountant.  More  and  more,  problems  of  business  organization 
and  management  are  claiming  his  attention. 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE  425 

The  public  accountant  may  have  calls  from  many  lines  of 
business,  and  he  cannot  be  expected  to  be  familiar  with  all. 
Though  a  broad  knowledge  of  business,  finance,  and  economics  is 
essential  as  a  foundation  on  which  the  practice  of  all  phases  of 
professional  accounting  must  rest — perhaps  as  much  as  the 
theoretical  training  in  the  science  of  accounting — the  tendency 
to  specialize  in  the  branches  of  cost  accounting,  tax  work,  and 
other  limited  fields  grows  with  the  complexities  and  ramifications 
of  business. 

Qualifications  and  Preparation  for  Profession 

A  few  observations  here  are  not  untimely  as  to  the  mental 
qualifications  and  the  preparatory  training  required  by  the 
aspirant  to  the  ranks  of  professional  accountants. 

In  addition  to  determination,  tact,  energy,  and  other  charac- 
teristics that  are  the  foundation  of  marked  success  in  every  line 
of  hiuiian  endeavor,  an  accountant  must  possess  mental  ability 
of  no  mean  order  combined  with  actual  experience  in  order  to 
pass  the  very  severe  tests  imposed  upon  those  who  seek  admission 
to  the  profession.  Of  the  many  who  present  themselves  at  the 
state  and  institute  examinations  only  a  minority  are  successful. 
While  an  analysis  of  the  cause  of  failure  would  in  many  cases 
disclose  a  dislike  for  that  mental  perspiration  which  is  part  of  the 
preparatory  training  for  every  dignified  profession,  yet  in  other 
cases  failure  would  be  foimd  to  be  due  more  to  misappUcation 
than  lack  of  mental  effort.  Unless  a  man  has  some  power  of 
deducing  facts  from  given  premises,  he  is  doomed  to  disappoint- 
ment in  his  effort  to  enter  the  profession  of  accountancy.  It  is 
true  that  analytical  power  may  be  developed  and  that  many 
successful  accountants  at  the  start  of  their  careers  revealed  no 
special  aptitude  for  their  profession.  Such  men,  however,  are 
exceptional,  and  for  every  one  who  succeeds  in  spite  of  no  pro- 
nounced bent  for  the  profession  a  score  or  more  fail.  Failure  to 
come  up  to  the  professional  standard  of  competence  in  account- 
ancy as  evidenced  by  a  state  certificate  is,  however,  less  serious 


426  ACCOUNTING— THEORY  AND  PRACTICE 

perhaps  to  the  student  of  accountancy  than  to  the  student  in  any 
other  professional  field,  for  a  knowledge  of  the  subject  is  valuable 
in  every  line  of  business,  while  the  mental  training  afforded  those 
who  fail  despite  an  earnest  effort  to  succeed  is  in  itself  of  value. 
Having  completed  a  university  course  in  business  and  account- 
ancy, the  student  who  looks  forward  to  a  career  as  a  certified 
public  accountant  should  familiarize  himself  with  the  laws  of  the 
various  states  regulating  the  practice  of  pubHc  accountancy. 
These  laws  usually  require  him  to  meet  some  educational  standard 
and  to  serve  an  apprenticeship  in  the  office  of  a  certified  public 
accountant,  before  he  can  receive  permission  to  take  the  examina- 
tion as  a  candidate  for  the  C.  P.  A.  certificate.  It  is  ordinarily 
not  possible  to  prepare  for  the  examination  in  less  than  five  years, 
because  both  a  theoretical  and  practical  knowledge  is  required  of 
many  branches  of  the  profession.  Such  knowledge  can  be  ob- 
tained only  by  combining  practical  work  in  the  employ  of  recog- 
nized professional  accountants  with  a  study  of  the  theoretical 
aspects  of  the  subject.  There  is  a  growing  tendency  on  the  part  of 
established  firms  of  accountants  admitting  members  to  their  staffs, 
to  give  preference  to  men  thoroughly  trained  at  recognized  schools. 

Ethics  of  the  Profession 

Professional  accountants  have  a  code  of  ethics  just  as  the 
medical  and  legal  professions  have  theirs.  A  few  of  the  acts 
which  are  considered  as  unethical  are: 

1.  The  soliciting  of  business  through  the  medium  of  adver- 

tising, or  encroaching  upon  the  business  of  another 
practicing  pubUc  accoimtant. 

2.  Offering  to  handle  an  engagement  for  a  fee  lower  than  that 

charged  by  another  firm  of  accountants  who  have 
rendered  satisfactory  service  to  a  client. 

3.  Giving  commissions  or  allowing  other  participation  by 

persons  not  practicing  pubHc  accounting,  out  of  profits 
from  professional  work. 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE  427 

4.  Accepting  fees  contingent  upon  the  results  of  professional 

services  rendered. 

5.  Certified  accountants  should  not  certify  to  statements  or 

accounts  which  have  not  been  entirely  verified  under 
their  supervision,  or  by  some  reliable  person  in  their 
employ. 

In  addition  to  the  code  of  ethics  concerning  the  relations 
between  accountancy  firms,  many  reputable  concerns  promul- 
gate certain  rules  to  be  observed  by  their  staffs  regarding  their 
relations  with  the  client.  These  rules  of  conduct  are  embodied  in 
booklets  entitled  "Confidential  Instructions"  or  "Office  Rules 
and  Instructions  to  Staff  Accountants."  The  following  rules 
illustrate  their  general  tenor: 

1.  Inasmuch  as  the  work  of  the  public  accountant  in- 
volves the  examination  of  private  affairs,  it  becomes  his  duty  to 
treat  as  strictly  confidential  everything  which  may  come  to  his 
attention.  Information  obtained  through  observation  may  help 
to  form  certain  opinions  of  the  business.  These  opinions  should 
not  be  mentoned  to  the  client's  employees,  but  should  be  re- 
served for  the  report. 

2.  Where  several  seniors  are  engaged  on  an  audit  it  is  ad- 
visable for  them  to  confer  before  they  give  an  opinion  to  a  client 
in  regard  to  the  accounting  methods  used  in  the  business  under 
examination. 

3.  Accountants'  check  marks  shovdd  not  mar  the  appearance 
of  the  client's  books  and  should  be  made  according  to  the  system 
which  the  firm  uses  on  all  its  work,  so  that  the  man  in  charge  of 
an  engagement  will  know  what  work  has  been  covered  should  any 
of  his  assistants  be  called  away  to  assist  on  another  engagement. 

4.  When  not  properly  supervised,  junior  accountants  in  their 
quest  for  information  sometimes  assume  the  attitude  of  private 
detectives,  thereby  antagonizing  the  personnel  in  a  client's  office. 
Such  conduct  creates  a  poor  impression  and  should  be  avoided. 

5.  The  auditor  should  make  an  effort  to  arrange  his  work  so  as 
not  to  interfere  with  the  regular  routine  of  the  client's  office;  he  is 
expected  also  to  observe  the  hours  of  the  business  in  which  he  is 
at  work. 


428  ACCOUNTING— THEORY  AND  PRACTICE 

Organization  of  Business 

The  accountants  who  conduct  their  businesses  as  corporations 
are  relatively  few  in  number.  The  ideals  of  a  professional  busi- 
ness demand  full  personal  responsibility  and  it  is  advantageous 
to  a  firm  to  include  in  its  title  the  names  of  men  of  recognized 
ability  in  their  particular  field.  Therefore  the  partnership  is  the 
customary  form  of  organization  for  a  business  which  sells  pro- 
fessional service.  The  official  attitude  of  the  leading  accountants 
of  the  country  as  expressed  through  the  American  Institute  of 
Accountants  is  decidedly  one  of  opposition  to  the  corporate  form 
of  organization. 

The  office  organization  of  a  firm  of  accountants  naturally 
depends  upon  the  size  of  the  business,  the  kind  of  work  in  which 
the  firm  may  specialize,  and  the  field  covered  by  its  operations. 
Almost  all  professional  businesses  begin  locally  and  extend  their 
operations  over  an  ever  widening  field  as  the  reputation  of  the 
firm  grows.  Thus,  the  more  prominent  accounting  firms  maintain 
branch  offices  in  the  principal  cities  of  the  country.  The  chart 
shown  below  (Form  i)  illustrates  the  organization  of  a  firm  of 
public  accountants  with  five  active  partners,  each  of  whom  directs 
some  division  of  its  work.  Usually,  the  method  of  organization 
is  to  delegate  the  supervision  of  the  different  branches  into  which 
the  work  naturally  divides  itself  to  partners  of  the  firm.  The 
development  of  any  branch  of  the  business  depends  almost  wholly 
upon  the  character  and  ability  of  the  men  in  charge,  and  the  size 
of  a  professional  business  depends  upon  keeping  together  the  men 
who  have  been  largely  responsible  for  building  it  up.  Hence, 
the  custom  is  prevalent  among  accountancy  firms  to  take  such 
men  of  their  staffs  into  partnership. 

Method  of  Dividing  Profits 

As  a  general  rule,  the  partners  are  divided  into  two  classes — 
senior  and  junior.  The  senior  partners  are  in  charge  of  the  main 
activities  and  the  junior  partners  occupy  the  less  responsible 
executive  positions.    For  the  purpose  of  the  division  of  profits 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE 


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430  ACCOUNTING— THEORY  AND  PRACTICE 

another  distinction  is  often  made  between  partners.  The  method 
of  dividing  profits  is  a  means  of  including  the  competent  and 
trusted  employee  in  the  ranks  of  those  junior  partners  who  have 
no  interest  in  the  business  other  than  that  they  are  entitled  to  a 
certain  share  of  the  profits  after  the  capital  or  good-will  shares 
have  been  paid  an  agreed  rate  of  interest.  The  plan  of  division 
which  has  received  the  indorsement  of  the  American  Institute 
of  Accountants  is  briefly  as  follows:  The  good- will  of  the  firm  is 
divided  into  loo  shares  and  these  shares  are  allotted  to  the  senior 
partners  usually  on  the  basis  of  their  capital  investment.  The 
good-will  partners  hold  title  to  all  the  partnership  assets  and  are 
hable  for  its  debts  in  the  same  proportion.  In  addition  to  the 
good-will  shares  a  nimiber  of  non-good-will  shares  are  created. 
Fifteen  such  shares  are  first  allotted  to  each  senior  partner  and 
then  as  many  of  those  shares  as  the  managing  board — consisting 
of  the  good-will  partners  or  chosen  from  them — determines,  but 
in  no  case  more  than  15  to  each  junior  partner  or  employee. 
In  the  division  of  profits,  after  interest  on  the  investments  of 
senior  partners  has  been  taken  account  of,  the  share  of  each 
partner — good-will  and  non-good- will — shall  be  that  part  of  the 
divisible  profits  represented  by  the  fraction  whose  numerator 
is  the  number  of  shares,  both  good-will  and  non-good- will, 
held  by  him  and  whose  denominator  is  the  total  good-will 
and  non-good-will  shares  held  by  all  partners.  No  partner 
has  the  right  to  object  if  his  fractional  interest  is  decreased 
by  an  increase  in  the  number  of  outstanding  non-good-will 
shares. 

Junior  partners  become  senior  partners  by  the  purchase  of  the 
good-will  shares  set  aside  for  that  purpose  or  available  upon  the 
death  or  retirement  of  a  member  of  the  board  of  management, 
composed  usually  of  the  senior  partners.  The  advantages  of 
this  method  are  its  flexibility  and  the  manner  in  which  the  in- 
terests of  the  older  partners  are  protected  while  at  the  same 
time  affording  a  means  of  rewarding  merit  by  the  allotment  of 
non-good-will  shares. 


ACCOUNTS  OP  PUBLIC  ACCOUNTANT'S  OFFICE  43I 

Matters  Governed  by  Partnership  Agreement 

The  partnership  agreement  which  governs  the  business  rela- 
tions between  members  of  the  firm,  usually  provides  for  the 
following : 

1.  Admittance  of  new  partners. 

2.  Responsibilities  or  duties  assumed  by  each  partner. 

3.  Division  of  profits  of  business. 

4.  Procedure  for  dissolution  in  the  event  of : 

(a)  Disability  or  death  of  a  partner. 

(b)  Retirement  of  a  partner. 

5.  Good-will  of  the  firm  and  settlement  with  estate  of  de- 

ceased partner. 

In  addition  the  agreement  will  include  the  customary  provi- 
sions regarding  contributions  of  capital,  the  keeping  of  accounts, 
etc.,  and  the  general  rules  which  are  to  govern  business  trans- 
actions. The  conditions  under  which  firms  are  organized  are  so 
different  that  ijio  standard  form  of  partnership  agreement  can  be 
presented. 

Office  Routine 

The  study  of  Form  i  indicates  the  general  nature  of  the  oflSce 
work  and  the  method  of  supervision.  One  partner,  for  instance, 
directs  the  work  of  the  office  personnel  through  the  managers  of 
the  various  office  departments,  and  in  consultation  with  the  other 
partners  engages  the  members  of  the  accounting  staff.  Other 
employees  are  engaged  through  the  managers  of  the  various  de- 
partments. The  partner  who  acts  as  office  manager  is  generally 
in  closest  touch  with  the  movements  of  the  staff.  His  major 
duties  are  to  handle  important  correspondence,  sign  checks  for 
the  firm,  and  supervise  the  billing  of  clients  for  the  work  on  com- 
pleted engagements.  The  other  partners  are  responsible  for  the 
work  of  the  members  of  the  staff;  either  directing  such  work  at  the 
client's  offices,  if  its  importance  merits  personal  attention,  or 
delegating  responsibility  to  the  supervising  accountants  or  junior 


432  ACCOUNTING— THEORY  AND  PRACTICE 

partners  if  any  more  urgent  matters  require  their  attendance  at 
the  office. 

The  outgoing  correspondence  of  partners  and  other  executives 
is,  in  a  large  concern,  usually  handled  by  a  correspondence  de- 
partment. Incoming  verifications,  such  as  those  received  from 
banks  in  confirmation  of  the  state  of  a  client's  bank  balance,  are 
received  and  distributed  by  this  department  to  the  accountant 
in  charge  of  the  engagement.  The  activities  of  this  department 
include  also  the  filing  of  general  records  and  correspondence  and 
the  maintenance  of  employment  records. 

The  partner  in  charge  of  the  general  office  may  be  relieved  of 
much  detail  work  by  one  or  more  assistants.  One  of  the  latter 
executives  as  a  rule  purchases  the  stationery  and  supplies  for  the 
use  of  the  main  and  branch  offices,  and  arranges  for  the  firm's 
printing — a  not  inconsiderable  item  of  expense. 

Proficiency  Reports 

The  junior  members  of  the  staff  of  a  large  concern  seldom  come 
in  close  contact  with  the  partners,  as  naturally  only  the  supervisor 
and  the  senior  in  charge  of  an  engagement  discuss  the  progress 
and  problems  of  a  business  with  the  partner  who  signs  the  report. 
To  keep  the  partners  informed  of  how  the  juniors  are  progressing,  a 
confidential  proficiency  report  is  submitted  to  the  office  manager 
by  the  senior  in  charge  of  an  engagement  after  its  completion. 

A  request  for  an  increase  of  compensation  by  a  member  of 
the  junior  staff  is  not  usually  granted  unless  the  proficiency 
reports  on  file  indicate  that  the  junior  handles  his  work  skilfully 
and  quickly,  that  he  conducts  himself  properly  in  the  client's 
office,  that  he  is  studying  accountancy  after  business  hours,  and 
that  in  the  opinion  of  the  senior  he  is  qualified  to  undertake  work 
of  greater  responsibility. 

Welfare  and  Educational  Work 

The  larger  accounting  firms,  appreciating  the  benefits  to 
themselves  and  to  the  staff  that  result  from  the  provision  of 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE  433 

educational  facilities,  insurance,  and  other  forms  of  welfare  work, 
offer  facilities  for  self-help  to  their  employees  who  are  willing 
to  help  themselves.  Such  facilities  include  lectures  on  account- 
ancy, auditing,  and  tax  procedure  for  the  yoimger  members  of 
the  staff  who  thereby  improve  their  ability  as  accountants  and 
prepare  themselves  for  the  Institute  and  C.  P.  A.  examinations. 
To  stimulate  interest,  oftentimes  an  examination  is  conducted 
at  the  end  of  the  course  and  a  financial  or  other  reward  is  made  for 
the  best  examination  paper.  Another  financial  reward  that  has 
much  merit  is  the  payment  of  a  cash  bonus  at  the  end  of  the 
calendar  year  if  it  has  been  a  prosperous  one.  The  most  satis- 
factory basis  for  paying  such  a  bonus  appears  to  be  the  number 
of  yeajs  that  the  staff  accountant  has  been  with  the  firm.  Pro- 
viding for  life  insurance  under  a  group  plan  at  the  expense  of  the 
firm  is  another  method  of  financial  reward. 

Office  Library 

A  good  library  in  the  office  of  a  firm  of  professional  account- 
ants is  a  very  valuable  asset,  especially  if  copies  of  the  audits, 
investigations,  etc.,  handled  by  the  firm  are  transferred  from  the 
files  of  the  report  department  to  the  library  files  after  they  have 
served  their  current  purpose.  The  larger  accounting  firms  have 
in  their  library  files  copies  of  all  forms  and  books  that  have  been 
devised  for  clients.  These  records  are  so  cross-indexed  that  their 
location  is  possible  either  by  reference  to  the  alphabetical  Hst  of 
systems  installed  for  clients,  or  to  a  card  record  classifying  the 
systems  by  business  or  industry.  If,  for  instance,  a  member  of 
the  staff  is  to  devise  a  cost  system  for  a  client  manufacturing 
jewelry,  he  may  be  able  to  find  such  a  system  in  the  files  of  the 
library  from  which  he  can  get  valuable  suggestions.  In  addition 
to  the  file  of  accounting  systems,  files  of  general  accounting  forms 
are  maintained,  indexed  as  to  kind  of  form  or  record  for  which 
used,  such  as  vouchers,  cash  books,  etc. 

Use  is  often  found  for  copies  of  mortgage  agreements,  reports 
on  particular  industries  and  general  business  problems  made  by 

VOL.  m— a* 


434  ACCOUNTING— THEORY  AND  PRACTICE 

Congressional  and  other  investigating  committees.  Catalogues 
of  the  various  kinds  of  labor-saving  devices,  and  the  like,  may  be 
kept  with  profit.  Some  of  these  papers  often  prove  to  be  almost 
invaluable  to  the  accountant  when  solving  problems  connected 
with  the  reorganization  of  a  business  in  financial  difficulty. 
Copies  of  the  various  tax  laws  should  also  be  on  file. 

The  libraries  of  most  accounting  firms  contain  files  of  the 
various  magazines  devoted  to  the  practice  of  accountancy,  and 
it  is  a  source  of  pride  to  the  older  firms  to  be  able  to  show  old 
copies  of  the  professional  magazines,  indicating  perhaps  the 
length  of  time  that  the  firm  has  been  in  business.  The  most 
authoritative  books  on  accoimting  and  the  specialized  branches 
thereof  are  kept  on  hand  for  reference  particularly  by  the  junior 
members  of  the  staff,  who  are  being  constantly  urged  to  improve 
their  knowledge  of  the  profession. 

Since  the  work  of  the  public  accountant  brings  him  into  con- 
tact with  all  kinds  of  business  enterprises,  it  is  very  important 
that  information  be  available  on  topics  of  finance,  industry,  and 
business  law.  For  a  small  library,  the  following  classification  will 
be  sufficient  for  fiUng  the  technical  and  general  reading  matter: 

1 .  Bookkeeping  and  Accounting 

2 .  Cost,  Factory  Accounts,  and  Organization 

3.  Auditing 

4.  Miscellaneous 

5.  Banking,  Economics 

6.  Law 

7.  Actuarial  Science  and  Mathematics 

8.  Municipal  and  Government  Reports 

9.  Periodicals 

10.  Tax  Laws  and  Decisions  Thereon 

Overtime  Work 

During  the  busy  season,  it  may  often  happen  that  members 
of  the  staff  are  compelled  by  force  of  circumstances  to  work  after 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE  435 

regular  hours.  In  conducting  some  audits,  e.g.,  those  of  banks, 
brokerage  houses,  etc.,  the  accounting  staff  must  always  do  its 
work  after  the  close  of  the  regular  business  day  and  may  have 
to  work  till  late  at  night.  The  practice  of  compensating  for 
overtime  varies  in  different  offices.  In  some  no  extra  pay  is 
given,  the  extra  expenses — supper  money,  etc. — being  paid,  of 
course,  by  the  office.  In  some,  overtime  work  is  allowed  to 
accrue  to  be  added  to  the  length  of  the  regular  vacation  period. 
In  others,  a  quarterly  settlement  of  overtime  is  made  at  the 
regular  rate  of  pay,  after  deducting  from  the  amount  of  over- 
time, the  unassigned  time  and  time  taken  off  by  the  staff  mem- 
ber for  the  same  quarter.  The  staff  member  always  receives 
his  regular  salary  even  though  this  overtime  settlement  brings  a 
negative  result. 

Routine  in  Handling  an  Engagement 

Before  any  work  is  undertaken  for  a  new  chent,  one  of  the 
partners  usually  interviews  him  concerning  the  kind  of  the  work 
to  be  done.  The  partner  must  definitely  ascertain  what  the  client 
desires  and  who  is  responsible  for  the  audit  so  that  no  dispute  will 
arise  as  to  the  work  or  payment  for  it. 

As  soon  as  an  engagement  is  undertaken,  accountants  of  the 
staff  are  assigned  to  the  task.  By  referring  to  the  engagements 
fist  (Form  2)  the  office  manager  determines  approximately  what 
members  of  the  staff  will  be  free  to  take  up  the  work.  Work  is 
usually  scheduled  about  two  weeks  in  advance.  The  engage- 
ments list  is  kept  and  maintained  in  the  office  manager's  office  and 
a  copy  is  sent  to  the  report  department  so  that  its  manager  may 
arrange  for  the  typing  of  the  report  at  the  proper  time. 

The  office  manager  maintains  a  location  sheet  also,  a  copy  of 
which  is  shown  in  Form  3.  Thereon  are  listed  in  alphabetical 
order  the  names  of  the  accountants  on  the  staff  and  where  they 
are  engaged.  This  sheet  is  written  up  at  the  beginning  of  the 
week,  and  such  changes  in  location  as  occur  during  the  week  are 
reported  to  the  partners  and  the  managers  of  the  various  office 


436 


ACCOUNTING— THEORY  AND  PRACTICE 


departments  on  a  daily  report  of  changes  in  location.  By  this 
means  the  office  manager  is  able  at  any  time  to  report  where  a 
particular  member  of  the  staff  is  located. 

One  or  more  senior  staff  accountants  with  a  sufficient  number 
of  juniors  are  assigned  to  each  engagement.  Upon  assignment  to 
an  audit,  the  staff  accountant  in  charge  of  the  work  obtains  from 


RECORD  OF  ENGAGEMENTS  IN  PROGRESS 

on                 -^"'v  to 

19_ 

Enoagement 

Location 

Date 
Commenced 

Expected 
Completion 

Accountants 

Can  be  Released 
on  or  About 

Hardtvare  Specialtiee  Company 

Newark.  N.  J. 

Julys 

July  SI 

J.  Doe       Supr. 
F.  Smith        Sr. 
a.  Clark        Sr. 
R.  Jonei         Jr. 
H.  Willis       Jr. 

.^ll<V  Si 

July  IT 
July  U 

Knoxfraud  Manufacturing  Co. 

Albany,  N.  Y. 

June  tl 

July  U 

jrMc Grady  Sr. 
E.  Greene     Jr. 

July  IS 
July  H 

WiUon  Ettatt 

190  Broadumy 

Juneta 

July  ti 

A.  HUtoH       Sr. 

July  U 

New  York 

M.  KeUy        Sr. 

Julyt* 

R.  BaU         Jr. 

Julytt 

Form  2.     Engagements  List 

the  files  the  working  papers  covering  a  previous  audit  (if  one  had 
been  made),  the  audit  program,  and  permanent  file.  These 
papers,  which  will  be  described  later,  enable  him  to  estimate  the 
amount  of  work  to  be  done  and  to  plan  accordingly. 

At  the  beginning  of  an  engagement  a  partner  or  supervisor 
introduces  the  senior  in  charge  of  the  engagement  to  the  client. 
If  the  partner  or  supervisor  cannot  be  present,  a  letter  of  intro- 
duction is  given  the  senior. 

In  'ihe  case  of  a  recurring  audit,  however  the  staff  accountant 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE 


437 


in  charge  of  the  work  at  the  previous  audit  is  assigned.  If  this 
is  impracticable  the  supervising  accountant  accompanies  another 
staff  accountant  and  his  assistants  to  the  client's  office,  and  brings 
to  their  attention  peculiarities  of  the  business  with  which  they 
should  be  familiar,  offering  suggestions  as  to  the  way  in  which  the 
audit  can  be  most  expeditiously  conducted. 


ACCOUNTANTS  LOCATION  SHEET 

on                -^"'y  ">                     1  q 

X 

Accountant 

Enoagemenr 

Location 

Dale  Available 

Adami,      B.S. 

Baldwin  J.S. 

Clark         a. 

Hardware  Spectalties  Co, 

Newark,  N.J, 

July  SI 

Doe            J. 

„          <• 

., 

Edmonds  IV.  {Partner) 

Various  clients 

Montreal,  Can. 

Returns  Aug.  1 

Farrow     M. 

Vacation 

Atlantic  City 

Aug.  t 

If  Mm       A. 

WiUon  EstaU 

N.  Y.  City 

July  n 

Jones          R. 

Hardware  SpeciaiUes  Co. 

Newark,  N.J. 

July  U 

KeUy          M. 

Wilson  EstaU 

N.  Y.  City 

July  it 

Greene      E. 

Knor/raud  Manufacturing  Co. 

Albany,  N.Y: 

July  H 

Hall           R. 

Wilson  EstaU 

N.Y.City 

July  tt 

Uc  Grady  J. 

Knozfraud  Manufacturing  Co. 

Albany,  N.Y. 

July  IS 

Willi*       W. 

Hardware  Specialtitis  Co. 

Newark,  N.J. 

July  U 

X.  Note:  If  reserved  for  an  engaaement  lo  be  started  when  work  at  hand  is  completed  check  X  column. 

Form  S'     Location  Sheet 


In  addition  to  this  work  the  supervising  accountants  visit  the 
members  of  the  staff  on  outside  engagements.  The  work  is 
divided  between  supervisors  according  to  their  specialty.  One 
supervisor  is  usually  in  charge  of  the  cost  accounting  work, 
another  keeps  in  touch  with  current  bank  examinations,  while 
still  another  may  specialize  in  the  income  tax  returns. 

Itisalsothedutyof  the  supervisors  to  examine  workingpapers, 
schedules,  and  statements  before  submitting  them  to  the  inter- 
ested partner,  who  in  turn  gives  them  a  further  careful  scrutiny. 


438  ACCOUNTING— THEORY  AND  PRACTICE 

Permanent  File 

Upon  the  first  visit  to  a  client's  office  a  set  of  papers,  known 
as  the  "permanent  file, "  is  prepared.  Just  what  this  file  should 
contain  is  a  matter  of  individual  preference,  but  the  following 
items  are  some  of  those  considered  indispensable: 

Abstracts  from : 

Articles  of  Incorporation 

By-Laws 

Minutes  of  Directors'  Meetings 
Particulars  of : 

Franchises 

Good-Will 

Trade-Marks  and  Copyrights 

Valuation  of  Properties 

Organization  and  Personnel 
Audit  Program 
Unusual  features  of  the  business  with  which  the  auditor 

should  be  familiar 

This  file  is  of  great  value  to  the  staff  accountant  who  is  to 
make  periodic  audits.  From  the  memoranda  contained  he  can 
familiarize  himself  with  the  organization  of  the  business  and  the 
system  of  accounts. 

The  staff  accountant  is  required  to  keep  this  file  up  to  date  by 
supplying  such  additional  information  as  will  be  of  value  at  sub  • 
sequent  audits.  The  confidential  nature  of  a  good  deal  of  this 
information  points  out  to  the  business  man  the  wisdom  of  assur- 
ing himself  of  the  high  professional  standards  of  a  firm  of  account- 
ants before  entering  into  negotiations  with  them.  The  methods 
of  securing  the  information  required  for  a  permanent  file  are 
usually  described  in  treatises  on  auditing  procedure  and  will  not 
be  reviewed  here. 

The  audit  program  serves  much  the  same  function  for  the 
staff  accountant  as  the  plans  of  the  architect  serve  for  the  builder 
of  a  house.    This  program  as  illustrated  in  Form  4  is  a  list  or 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE  439 

schedule  of  the  work  to  be  done  during  the  course  of  the  audit. 
Provision  is  made  on  the  program  to  keep  track  of  the  work  of  the 
various  members  of  the  staff  assigned  to  the  audit.  Reference 
to  the  form  will  indicate  the  content  and  method  of  use  of  a  typi- 
cal audit  program  for  a  trading  business. 

One  of  the  uses  of  the  program  is  to  record  in  the  columns 
shown  thereon  the  time  spent  by  assistants  on  the  work  assigned 
to  them.  As  each  operation  is  completed  the  time  is  noted  on  the 
program.  The  total  time  as  per  the  audit  program  must  equal 
the  total  time  reports  made  up  weekly  by  all  those  on  the  engage- 
ment. A  method  of  control  over  time  reports  is  thus  provided. 
Where  the  audit  is  made  in  interim  periods,  columns  are  provided 
to  show  the  hours  spent  on  the  work  by  the  various  members  of 
the  staff  at  each  period. 

Accountant's  Working  Papers 

The  accountant's  working  papers  are  the  connecting  hnk  be- 
tween the  client's  records  and  his  report;  they  should  be  clear  and 
definite  so  that  whenever  reference  to  them  is  necessary  the  in- 
formation sought  will  be  readily  obtained.  Each  sheet  of  the 
working  papers  should  be  indexed  by  subject  and  headed  with  the 
name  of  the  business  under  audit,  the  accounts  it  covers,  and  the 
date. 

An  effort  has  been  made  by  some  accounting  firms  to  stand- 
ardize the  form  and  make-up  of  the  working  papers.  This 
standardization  in  no  way  limits  the  accountant's  initiative  in 
presenting  facts  and  information  in  addition  to  the  minimum 
required  in  the  working  papers.  The  chief  advantage  of  stand- 
ardized working  papers  is  that  they  provide  a  uniform  method  of 
indexing  and  of  presenting  the  details  of  a  client's  accounts  to  the 
interested  partner  in  such  a  manner  that  the  work  of  examination 
is  expedited.  While  it  is  not  expected  that  the  standard  form  can 
be  used  in  all  cases,  the  staff  accountants  are  required  to  main- 
tain the  general  principles  outlined.  The  conditions  affecting  the 
business  of  many  clients  vary  so  extensively  that  the  judgment 


440 


ACCOUNTING— THEORY  AND  PRACTICE 


Hardware  Specialties  Company,  Inc. 

Audit  of  Accounts 

December  31,  19 — 


Description  of  Work 


General  Ledger 

Prepare  Trial  Balance 

Footings  of  Accounts 

Check  Balances — start  of  period  audited 

Check  Postings — subsidiary  records 

Analysis  of  Accounts 

General  Journal 

Check  Footings 

Check  Postings 

Examine  Entries 

Vouch  entries  where  necessary 

Cash  Journal 

Check  Footings 

Examine  Entries 

Check  Postings 

Compare  Debits  with  Bank  Statements 

Compare  canceled  bank  checks  with  credit  entries. . . . 
Vouch  items  charged  to  General  Expense  Accounts  . . . 

Check  contra  entries 

Reconcile  cash  balances  with  cash  in  hand  and  in  bank  . 
Mail  verification  certificates  to  banks  in  which  funds 

are  deposited 

Voucher  Register 

Check  Footings  and  Extensions 

Examine  Vouchers  and  compare  with  Register 

Examine  distribution  of  items 

Test  dates  of  items  marked  "Paid" 

Take  list  of  unpaid  items 

Check  Postings 

Sales  Book 
Examine  entries  to  determine  if  all  are  genuine  sales  of 

period 

Compare  entries  with  duplicate  sales  tickets 

Test  Postings  to  Customers  Ledger 

Check  Postings  to  General  Ledger  sales  accounts 

Check  Footings  and  distribution 

Check  Returns  if  entered  in  section  of  this  book 

Customers  Ledger 

Test  Postings 

Test  Account  Footings 


Accountants'  Time  (Hours) 


H.  R.      S.  T.       J.  F.      J.  M 


Form  4. 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE 


441 


Hardware  Spkcialties  Co.,  Inc. 

Audit  of  Accounts  (Continued) 

December  31,  19 — 


Description  of  Work 


Customers  Ledger  (Continued) 

Prepare  Trial  Balance 

Check  with  controlling  account  in  General  Ledger. 
Purchase  Book 

Scrutinize  entries 

Compare  entries  with  purchase  invoices 

Test  Postings  to  Creditors  Ledger 

Check  all  Postings  to  General  Ledger 

Examine  shipping  department  records  for  returns  . 
Foot  columns  and  check  distribution 


Creditors  Ledger 

Test  Footings 

Prepare  Trial  Balance 

Compare  with  General  Ledger  Controlling  Account 
Minute  Book 

Make  abstracts  of  Minutes 

Examine  Charter  and  By-Laws 

Obtain  data  on  organization  of  firm  and  personnel  for 

permanent  file , 

Certificates 
Prepare  certificates  to  verify: 

Bank  Balances 

Certificates  regarding  Liabilities 

Certificates  on  Inventories 

Miscellaneous 

Conferences  with  Clients 

Conferences  with  Partners  and  Supervisors 

Examination  of  Stock  Records 

Preparation  of  Report  and  Statements 

List  of  books  or  records  to  be  examined 

Traveling  time,  etc 


Total  Time  of  Accountants , 


Accountants'  Time  (Hours) 


H.  R.      S.  T.       J.  F.       J.  M. 


Audit  Program 


442  ACCOUNTING— THEORY  AND  PRACTICE 

of  the  accountant  in  charge  must  determine  what  schedules  are 
necessary  to  support  the  items  on  a  balance  sheet  or  a  profit  and 
loss  statement. 

For  his  working  papers,  the  staff  accountant  obtains  from  the 
cHent,during  the  course  of  the  audit,  the  following  three  certificates : 

1.  A  certificate  regarding  inventories,  upon  which  the  client 
certifies  that: 

(a)  The  inventories  submitted  were  prepared  by  the 

regular  clerks  of  the  business  under  the  super- 
vision of  an  officer  thereof. 

(b)  The  quantities  are  correct  as  to  count,  measure- 

ment, or  other  description. 

(c)  The  inventory  is  stated  at  cost,  less  trade  discounts, 

etc.,  or  that  it  is  stated  at  market  value  if  that  is 
lower  than  cost. 

(d)  Provision  has  been  made  for  obsolete  goods  and  for 

depreciation. 

(e)  All  the  items  in  the  inventory  have  been  paid  for 

or  that  the  liability  therefor  has  been  set  up  on 
the  books. 

(f)  All  goods  sold  have  been  eliminated  from  the 

inventory. 

2.  A  certificate  regarding  liabilities  worded  as  follows: 

The  undersigned  hereby  certifies  that  on 

there  were  outstanding  the  following  liabilities  which 
were  not  shown  in  the  accounts,  all  others  having  been 
recorded:  ; 


The  following  assets  of  the  company  were  pledged 
at as  security  for  liabilities: 


By 

Date. 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE  443 

3.  A  bank  certificate.  The  client  is  requested  to  write  a 
letter  to  his  bank  asking  it  to  certify  to  the  accountant  as  to  the 
following  matters  as  at  the  close  of  business  on  a  certain  date: 

(a)  The  balance  of  the  bank  account. 

(b)  A  list  of  notes  payable  or  loans,  showing  the  respec- 

tive dates  made  and  due. 

(c)  A  Hst  of  any  notes,  securities,  accounts  receivable, 

etc.,  assigned  to  the  bank  as  collateral  or  held 
by  them  for  safekeeping  or  for  collection. 

(d)  A  Hst  of  notes  discounted  by  the  bank. 

(e)  A  statement  of   guarantees   or   indorsements  on 

other  notes  or  loans  held  by  the  bank. 

This  letter  is  mailed  personally  by  the  stafif  accountant  and 
the  bank  should  be  requested  to  send  the  reply  direct  to  the 
accountant's  office. 

In  the  examination  of  banks  numerous  other  forms  of  verifi- 
cation certificates  are  used. 

Reports  and  Certificates 

After  an  engagement  has  been  completed  and  the  staff  ac- 
countant's rough  draft  report  and  working  papers  have  been 
examined  by  the  supervising  accountant  in  charge,  the  partner 
responsible  for  the  work  examines  the  working  papers  to  deter- 
mine principally  whether  the  report  correctly  interprets  the 
cHent's  financial  condition,  and  whether  the  audit  has  been  made 
in  sufficient  detail.  Should  any  part  of  the  work  appear  to  be 
incomplete,  or  the  information  in  the  working  papers  be  insuffi- 
cient for  rendering  an  opinion  on  certain  phases  of  the  work,  the 
stafif  accountant  amends  or  amplifies  his  draft  report  as  required, 
after  which  it  is  turned  over  to  the  manager  of  the  report  depart- 
ment to  be  typed  in  the  standard  form  used  by  the  firm.  After 
going  through  the  routine  of  the  report  department  the  report  is 
sent  to  the  interested  partner  for  signature  before  being  mailed  or 
delivered  to  the  client  by  the  correspondence  department 

As  many  business  men  do  not  understand  the  technique  of 


444  ACCOUNTING— THEORY  AND  PRACTICE 

accounting,  the  statements  in  the  report  are  supplemented  with 
enough  comments  to  make  them  easily  understood.  The  writing 
of  a  good  report  is  an  art  in  itself  and  part  of  the  training  of  the 
junior  is  to  familiarize  himself  with  the  style  of  report  he  may  be 
called  upon  to  write  when  in  charge  of  an  engagement  as  a  senior. 
As  the  public  accountant  is  responsible  for  the  contents  of  his 
reports  and  statements,  it  is  necessary  for  him  to  protect  himself 
against  misquotation  from,  or  the  wrong  use  of,  the  report  sub- 
mitted to  a  client.  Most  of  the  large  firms  append  to  their  reports 
a  statement  worded  somewhat  as  follows : 

It  is  understood  that  if  this  report  and  statements,  or  any  part 
thereof,  be  published,  that  it  be  published  in  its  entirety;  or 
should  only  extracts  therefrom  be  published,  then  such  extracts 
must  be  submitted  for  our  approval  before  being  published. 

Auditors'  certificates  are  as  a  rule  very  brief.  In  them  the 
auditor  states  at  the  bottom  of  the  balance  sheet  his  opinion  of 
the  financial  condition  of  the  business  examined.  The  two  speci- 
mens to  follow  illustrate  the  general  character  of  an  auditor's 

certificates: 

We  have  examined  the  books  of  the  Knoxfraud  Manufactur- 
ing Co.,  Inc.,  of  New  York  for  the  year  ended  December  31, 19 — , 
and  certify  that  the  attached  Balance  Sheet  is  in  accordance 
therewith  and,  in  our  opinion,  is  properly  drawn  up  so  as  to  show 
the  true  financial  condition  of  the  Company  as  at  December  31, 
19 — ,  and  that  the  relative  Profit  and  Loss  Statement  is  a  correct 
record  of  its  operations  for  the  year  ended  on  that  date. 

January  15,  19— 

Certified  Public  Accountants 

We  have  made  an  audit  of  the  books,  records,  and  accounts  of 
the  Rocky  Mountain  Railroad  Company  for  the  fiscal  year  ended 
June  30, 19 — .  We  have  verified  the  securities  owned,  the  cash 
account,  and  other  current  assets;  have  examined  the  capital  and 
property  accounts,  and  the  items  entering  into  the  Income  and 
Profit  and  Loss  Accounts,  and, 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE 


445 


We  hereby  certify,  that  the  attached  Consolidated  Balance 
Sheet  correctly  sets  forth  the  financial  condition  of  the  Company 
on  June  30,  19 — ,  that  the  accompanying  Statement  of  Income 
and  Profit  and  Loss  is  correct,  and  that  the  books  of  the  Com- 
pany are  in  agreement  therewith. 

July  31,  19— 


Certified  Public  Accountants 

It  is  apparent  that  the  value  of  a  certificate  depends  on  the 
degree  of  its  freedom  from  qualification. 

Filing  of  Reports 

Carbon  copies  of  the  reports  delivered  to  clients  are  retained 
by  the  report  department  for  the  files  of  the  firm.  Here,  also,  are 
kept  the  files  of  working  papers,  permanent  file,  and  accountants' 
time  sheets.  To  provide  for  the  increasing  number  of  reports  on 
file,  a  loose-leaf  record  (Form  5)  is  maintained  showing  in  alpha- 


Name   Knoxjraud  Mfa.  Co.  (N.Y.Branch)          Office         New  York 
Address  teg  WaU  Street.  N.  Y.                               Report  Class  No.      isoo  K 

Working  Paper  File  No.      sm 

Description  of  Work 

Coples 
Typed 

No.  of  Copies 
Delivered 

To 

Date 

Audit.year  endedDec.Sl,19- 

U 

3 

W.  Atkins,  Pres. 

Jan.  28/— 

Form  5.    Loose-Leaf  Record  of  Reports  Delivered 

betical  order  the  names  of  clients  to  whom  reports  have  been 
delivered.   To  illustrate  the  method  of  filing  a  report  and  working 


446  ACCOUNTING— THEORY  AND  PRACTICE 

papers,  assume  that  the  work  has  just  been  completed  on  the  first 
audit  report  of  the  Knoxfraud  Manufacturing  Company's  ac- 
counts as  at  December  31,  19 — .  A  loose-leaf  form  is  numbered 
for  indexing  purposes  and  thereon  are  entered  the  name  and 
address  of  the  client,  the  name  of  the  officer  to  whom  reports  are 
to  be  delivered,  and  the  dates  on  which  the  accounts  were  audited. 
If,  for  instance,  the  report  covers  the  3,484th  engagement  of  the 
firm,  the  working  papers  and  accountant's  time  sheets  are  so 
numbered  and  filed  under  that  number.  The  Knoxfraud  Manu- 
facturing Company,  being  the  makers  of  check-writing  machines, 
is  classified  under  manufacturers  of  office  appliances.  If  the  class 
number  for  that  line  of  business  happens  to  be  1500,  the  report 
would  be  filed  under  that  class  number  and  section  K.  the  first 
letter  of  the  name. 

Branch  Of&ces 

Since,  as  previously  stated,  the  larger  pubHc  accounting  firms 
maintain  branch  offices  in  the  principal  cities  of  the  country, 
in  cities  where  a  firm's  business  does  not  warrant  a  branch  office, 
arrangements  are  usually  made  with  accountants  of  standing  to 
act  as  agents  or  correspondents.  The  branch  business  is  trans- 
acted in  the  same  manner  as  at  the  main  ofiice,  and  branch  manag- 
ers often  receive  their  appointments  through  their  record  of 
achievement  at  the  main  office.  When  an  engagement  is  handled 
exclusively  by  a  branch  office,  the  branch  manager  signs  the 
report,  a  copy  of  which  is  submitted  to  the  main  ofiice  for  the 
reason  that  the  senior  partners  are  responsible  for  the  opinions 
and  accuracy  of  reports  rendered  under  the  name  of  the  firm. 
A  firm  may  be  subjected  to  criticism  for  allowing  branch  ofiice 
managers  who  are  not  certified  accountants  to  sign  reports. 
Should  the  staff  of  a  branch  office  audit  the  local  accounts  of  a 
company  whose  principal  ofiice  is  located  in  the  city  where  the 
main  office  of  the  accountants  is  situated,  the  working  papers 
covering  the  accounts  examined  would  be  forwarded  to  the  office 
which  is  to  render  the  report. 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE  447 

The  reports  sent  by  the  branch  office  to  the  main  office  depend 
upon  the  kind  of  accounting  system  maintained  at  the  main  office. 
The  reports  in  any  case  include  a  list  of  engagements  secured, 
those  to  be  commenced,  and  those  which  have  been  completed 
and  are  billed. 

Terms  of  Engagement 

A  professional  firm  sells  its  service  and  where  this  service  is 
rendered  in  part  by  the  employees  of  the  firm,  a  charge  must  be 
made  proportionate  to  the  skill  and  experience  of  the  persons 
whose  time  is  occupied  in  the  service  of  a  client.  The  profit  on  an 
engagement  is  the  difference  between  the  fee  charged  for  the 
work  done  and  the  full  cost  of  the  engagement,  which  cost  should 
include  besides  the  labor  cost  a  fair  proportion  of  the  office  over- 
head expense  and  any  direct  expenses  incurred  on  the  engagement, 
such  as  traveling  expense,  postage  used  in  securing  verification  of 
customers'  balances,  etc.  Traveling  and  hotel  expenses  are  some- 
times quoted  to  the  client  on  a  guaranteed  day  basis  in  which  case 
there  is  usually  a  profit  or  a  loss  on  these  items. 

Engagements  are  taken  either  for  a  fixed  fee  to  be  paid  when 
part  or  all  the  work  is  completed  or  on  a  per  diem  basis,  i.e.,  a 
definite  daily  charge  is  made  for  the  time  of  each  junior,  senior, 
and  partner  engaged  on  the  work  plus  the  time  of  the  report  de- 
partment spent  in  preparing  reports.  It  should  be  understood 
that  the  charge  made  is  for  the  type  of  work  to  be  done  and  not 
for  the  men  used  on  the  work.  Thus  if  the  work  to  be  done  is 
junior  work,  and  a  staff  senior  is  assigned  to  it,  the  client  is 
charged  for  his  services  at  the  junior's  rate.  Good  management 
in  the  accountant's  office  does  not  allow  this  to  happen  often. 
As  a  general  rule  the  client  prefers  the  work  to  be  done  for  a 
stipulated  fee,  whereas  it  is  fairer  for  the  accountants  to  base  the 
charge  on  time.  An  audit  may  and  frequently  does  require  a 
more  thorough  investigation  of  the  records  than  at  first  seemed 
necessary  to  furnish  the  client  with  the  required  information. 
If  then  the  fee  has  been  definitely  predetermined,  the  auditors 


448  ACCOUNTING— THEORY  AND  PRACTICE 

may  either  incur  a  loss  which  naturally  they  are  loath  to  do  or 
they  must  charge  the  client  more  than  the  stated  fee  to  which  he 
may  be  equally  unwiUing  to  consent,  or  the  thoroughness  of  the 
investigation  must  be  sacrificed.  This  latter  course  is  especially 
unsatisfactory  to  both  auditors  and  cHent.  For  these  reasons,  a 
frequent  practice  is  to  charge  for  the  work  to  be  done  on  a  per 
diem  basis,  with,  however,  a  maximum  fee.  If  the  audit  reveals 
that  a  more  detailed  examination  of  the  books  is  necessary  than 
is  arranged  for  when  the  contract  agreement  is  made,  the  extra 
work  is  done  only  after  the  client  has  consented  to  the  additional 
charge  for  such  work.  This  method  of  charging  for  the  work 
proves  in  practice  the  fairest  arrangement  for  both  auditors  and 
client. 

Costing  an  Engagement — ^Time  Reports 

Accounting  for  an  accountant's  office  does  not  differ,  in  the 
main,  from  standard  accounting  methods  and  practice.  The 
practice  and  procedure  peculiar  to  accounting  offices  are  con- 
cerned largely  with  the  problem  of  costing  and  that  of  income. 
The  problem  of  income  is  discussed  on  pages  456-460.  That  of 
costing  will  be  considered  here. 

The  problem  of  costing  is  mainly  that  of  keeping  track  of  all 
time  spent  on  the  engagement  and  all  expenses  incurred  directly 
in  connection  with  it.  The  basis  for  the  allocation  of  time  to  the 
engagement  is  the  time  report  which  must  be  turned  in  by  every 
person— partner,  supervisor,  staff  accountant,  report  department 
clerk,  etc. — spending  time  directly  chargeable  against  the  engage- 
ment. In  some  offices  a  daily  report  is  made  out;  in  others  this  is 
clone  weekly.  Regardless  of  when  the  report  is  made  out,  it  is 
customary  for  the  staff  accountants  and  partners  to  keep  a 
lecord  of  their  time  spent  on  an  engagement,  the  nature  of  the 
work  done,  and  other  similar  data,  in  diary  form.  In  some  offices 
an  accountant's  diary  is  used  for  this.  In  others  a  report  similar 
to  Form  6  serves  the  same  purpose.  Time  reports  must  be  turned 
into  the  office  at  the  end  of  the  week  and  at  the  end  of  the  month, 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE 


449 


when  the  last  day  falls  before  Saturday,  for  the  portion  of  that 
week. 

In  some  offices  members  of  the  staff  are  asked  to  turn  in  two 
reports,  one  the  diary  form  referred  to  above,  the  other  a  summar- 
ized report  showing  total  time  spent  on  each  chent  for  the  week. 


KNIGHT  AND  DAY 

Certified  Public  Accountants 

New  York  City 

DETAILED  TIIVIE  REPORT 

Of       F.Wilson                                         pn gaged  on  Southern  Glue  Co.  Atlanta,  Ga. 
|.^^W^ek  ^gyg  ended  July  18,  l9-Accounts  examined  Yr.  ended  June  30,w_(Audit) 

Accounts  or  Books 

Description  of  Work 

Time  (Hours)                   | 

Mon. 

Tues. 

Wed. 

Thur. 

Fri. 

Sat. 

Total 

General  Ledger 

Trial  Balance 

3 

3 

.. 

Analysis  of  Accounts 

5 

8 

8 

21 

Properties 

• '   of  valuations  affixed  assets 

8 

8 

Total  Hours 

8 

8 

8 

8 

S2 

Signed             F.Wilson                  Accountant  in  charae              H.Anderson 

Form  6.    Accountant's  Time  Report  for  Each  Client 

The  summarized  form  (Form  7)  is  the  basis  for  charging  the 
cUent's  account  and  also  for  costing  the  engagement.  Form  8  is  a 
combination  of  Forms  6  and  7,  except  as  to  the  expense  report 
feature,  and  is  the  more  usual  type.  It  will  be  noted,  also,  that 
Form  7  gives  the  basis  for  the  charge  to  unassigned  time  and  to 
the  client's  account  for  expenses,  as  explained  on  page  460. 

For  engagements  handled  on  a  flat  fee  basis  and  also  for  the 
purpose  of  making  an  audit  program  for  subsequent  use,  another 
analysis  of  time  reports  is  sometimes  made.  On  the  initial  audit, 
it  is  apparent  that  certain  features  must  be  investigated  more 

VOL.  in — 29 


450 


ACCOUNTING— THEORY  AND  PRACTICE 


thoroughly  than  will  be  needed  at  subsequent  audits.    It  is  there- 
fore desirable  to  analyze  the  total  time  spent  on  such  engage- 


KNIGHT  AND  DAY 

Certified  Public  Accountants 

New  York  City 

ACCOUNTANT'S  REPORT 

Week 
for  the       R      Hays  endpd         July  25 

Name    ■F'-  Wilson 

_19 



Addrp<;s   New  York  City                         Attached  to      N.  Y.       office 

Client 

Time  (Hours) 

( Salary  Rate 

For  Use  of    Bookkeeping 

Dept.  Only) 

Mon. 

Tues. 

Wed. 

Thurs. 

Fri. 

Sat. 

Total 

Southern  Glue  Co. 

8 

R 

8 

S 

S2 

$51,.50 

Mechanics  Hardware  Co. 

8 

8 

13.70 

Unemployed 

i 

U 

6.S0 

8 

s 

8 

8 

8 

i 

U 

$75.00 

Expense  Account 

Date 

Receipts 

Amount 

Date 

Disbursements 

Amount 

July  12 

July  12 

R.R.  Ticket  So.  Glue  Co 

$1,0 

CashN.Y.  Office 

$00 

July  15 

Belmore  Hotel 

10 

Total  Receipts 

}60 

Total  Disbursements 

$50 

Balance  due  Acct. 

Balance  Due  Office 

10 

Total 

$S0 

Total 

$60 

Remarks 
Examined 

and  found  rnrrant                  H.  Anderson 

Accountant  In  charoe 

1 

Form  7.     Accountant's  Weekly  Summary  Time  and  Expense  Report 

ments  on  the  basis  of  the  type  of  work  done  so  that  when  subse- 
quent quotations  are  asked  for,  definite  data  will  be  available  on 
which  to  base  them.    This  time  report  summary  (Form  9),  which 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE 


451 


is  made  up  from  the  detailed  reports  on  Form  6,  is  valuable  also 
in  checking  any  marked  difference  in  costs  as  between  different 
audits  of  the  same  business.    For  the  employees  of  the  report 


KNIGHT  AND  DAY 

CERTIFIED   PUBLIC  ACCOUNTANTS 

,20    BROADWAY                      „Pp„BT   r,r    MB 

HATE  PER  HOUR 

FOR  WEEK  ENDIN'I                                                         *B 

CASE 

HOURS 

AMOUNT 

LEDGER 
FOLIO 

Sun. 

Mon. 

Tues 

Wed. 

Thu. 

Fri. 

Sat. 

TOTAL 

. . . 



1 

, , 

J 

TOTALS  (CHARGED  TIME) 

TOTALS  (UNCHARGED  TIME) 

TOTALS 

HOURS    ENGAGED 

DETAILS  OF  WORK 

UNDER 
DIRECTION  OF 

FROM 

TO 

TOTAL 

SUNDAY 19 

MONDA 

Y                                                         fO 

NO. 

Form  8.     Summarized  and  Detailed  Time  Report 

The  reverse  side  provides  space  for  detail  of  work  for  the  remaining  days  and  for  the  signature 

of  the  accountant 

department — typists,  checkers,  clerks,  etc. — and  all  others  whose 
time  can  be  charged  directly  to  the  engagement,  a  time  report 
similar  to  that  required  of  the  staff  is  used.    Form  10  is  tj^jical. 


452 


ACCOUNTING— THEORY  AND  PRACTICE 


KNIGHT  AND  DAY 

Certified  Public  Accountants 

New  York  City 

TIME  REPORT  SUMMARY 

EngaRGment  Hanover  Trading  Co.  Address  iVew  York  City  FngflgAm«.nt  No.  ^^^^ 
ppcjrriptinn  nf  Work  ^i^dit.  Year  ended  June  30,  19— 

Wnrk  rnmmpnrpd  July  6,  19-                       Finished      August  10,  19— 

Arrniint^nt  jp  charge  ^-  A^'i^r^on             assisted  by  F.  Wilson  &  R.  Emerson 

Description  of  Work 

Accountant's  Initials 
and  Time  (Hours) 

General  Ledger-Trial  Balance  &  Statements 

H.A. 

F.W. 

R.E. 

F.E. 

Total 

15 

15 

••             "        Analysis  of  Accounts 

20 

20 

Cash  Book-Reconciliation  of  Accounta  etc. 

6 

2 

8 

Voucher  Register-  Vouching  &  examination 

h 

i 

of  entries,  distribution,  etc. 

8 

8 

Sales  Book-  Comparing  duplicate  invoices 

S 

8 

Testing  footings  &  postings 

10 

10 

Purchase  Book:  Checking  postings 

5 

5 

10 

Comparing  with  receiving 

2 

2 

i 

dept  records 

Examinations  of  minutes,  contract,  etc. 

3 

S 

Supervision  of  Work,  etc. 

2 

5 

7 

Total  Time 

iO 

25 

27 

5 

97 

Partner's  Approval           F.Edwards              nato  Rillficl           Aug.  SI,  19 — 

Remarks:- 

Form  g.    Summary  of  Time  Spent  on  Engagement 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE 


453 


KNIGHT  AND  DAY 

Certified  Public  Accountants 

New  York  City 

OFFICE  TIME  REPORT 

for  the    6    days  ended      August  u       19     . 

iu|  -              J.  Smith 
Address           Brooklyn  N.Y. 

Client  or  Account 

Time  (Hours) 

(For  use  of 
Bookkeeping  Dept. 
Only) 

Mon. 

Tues. 

Wed. 

Thurs 

Fri. 

Sat. 

Total 

Folio 

Rate               1 

Southern  Glue  Co. 

i 

i 

i9 

$  3 

— 

Hanover  Insurance  Co. 

8 

8 

8 

i 

8 

36 

53 

2? 

— 

Expense  Accounts 
Miscellaneous 

Bookkeeping  Dept. 

Correspondence  Dept. 

Stationery  Deot. 

Filing  Dept. 

Library  Dept.  Exp, 

Report  Dept.  General 

i 

3 

Office  General 

Unassiflned 

Sickness  &  Late 

Holiday  &  Vacation 

Total  Time 

8 

8 

8 

8 

8 

4 

iO 

Total  ,  ,» 
Salary*  ^^ 

- 

Form  JO.     Office  Time  Report 


454  ACCOUNTING— THEORY  AND  PRACTICE 

Cost  Ledger — Not  Controlled  by  General  Ledger 

It  is  the  almost  universal  practice  to  make  the  cost  records 
statistical,  i.e.,  not  to  tie  them  into  the  general  books.  Form  ii 
is  a  typical  cost  ledger  account.  Entries  for  time  and  expense  are 
made  from  the  weekly  time  and  expense  report  of  each  account- 
ant or  office  clerk  on  the  engagement  and  from  the  office 
petty  cash  or  other  record  for  expenses  incurred  from  the  head 
office. 

Determining  the  Costing  Rate  for  Salaries 

Practice  varies  in  determining  the  salary  rate  for  cost  pur- 
poses. In  some  firms  the  regular  salary  rate,  i.e.,  the  pay-roll 
rate,  is  used,  all  other  expenses  going  into  overhead.  Thus,  in 
addition  to  the  customary  overhead  items,  the  expenses  of  im- 
assigned  time,  vacation  and  sick  pay,  etc.,  are  included.  The 
better  practice — though  entailing  a  little  more  initial  work — is 
to  determine  a  salary  rate  for  each  man  of  the  regular  staff  of 
such  an  amount  as  will  include  these  items  of  unassigned  time, 
etc.  This  seems  a  more  logical  practice,  for,  from  the  standpoint 
of  a  man's  earning  capacity,  his  cost  per  day  is  not  on  the  basis 
of  his  weekly  or  monthly  wage  but  rather  his  yearly  wage  divided 
by  the  number  of  days  of  his  productive  employment.  In  this 
way  these  expenses  are  made  to  follow  each  man  and  are  allocated 
to  the  engagements  to  which  he  is  assigned.  Their  inclusion  in 
general  overhead  has  the  effect  of  allocating  the  unassigned  time 
of  high-priced  employees  both  to  the  work  on  which  they  are 
engaged  and  to  other  engagements  on  which  they  spend  no  time, 
thus  loading  the  less  important  engagements  with  a  portion  of  the 
expenses  which  the  more  important  work  demanding  the  higher 
type  of  ability  should  bear.  To  determine  a  man's  cost  rate  imder 
this  second  method,  his  average  productive  time  during  a  year  is 
divided  into  his  year's  salary,  the  quotient  being  his  per  diem  rate 
for  cost  purposes.  A  rate  card  is  made  up  for  the  entire  staff  and 
used  by  the  cost  ledger  clerk  in  making  his  extensions.  Theo- 
retically, the  rate  for  office  employees  should  be  similarly  deter- 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE 


455 


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456  ACCOUNTING— THEORY  AND  PRACTICE 

mined.     Practically,  this  may  not  be  worth  while.     Partners' 
rates  for  costing  purposes  are  more  or  less  arbitrary. 

Handling  Overhead 

Practice  also  varies  in  the  use  of  overhead  rates  and  in  their 
determination.  Some  firms  "cost"  the  engagement  only  as  to 
direct  time  and  expense.  Others  allocate  overhead  also.  The 
basis  used  for  the  distribution  of  overhead  is  a  time  rate — a  pro- 
ductive hour  rate.  The  sum  total  of  overhead  expense  divided 
by  the  productive  or  chargeable  hours  of  the  staff  for  the  same 
period  gives  an  hourly  rate.  The  chargeable  hours  on  a  given 
engagement  multipHed  by  this  rate  gives  the  burden  for  that  en- 
gagement. In  some  firms  a  more  conservative  practice  divides 
the  total  overhead  expense  by  the  chargeable  time  of  the  per- 
manent staff  only — not  the  entire  staff — to  determine  the  rate. 
Some  provision  for  fluctuations  in  volume  of  business  from  year 
to  year  must,  of  course,  be  made  in  the  establishment  of  an  over- 
head rate.  The  method  just  referred  to  for  this  purpose  is  cer- 
tainly a  conservative  one  and  should  usually  occasion  a  pleasant 
surprise  when  the  final  results  are  made  up  from  the  financial 
records. 

The  Margin  column  on  the  cost  ledger  sheet  (Form  ii)  is 
used  to  record  the  difference  between  the  amount  for  which  a 
flat-rate  engagement  is  undertaken  and  the  amount  of  earnings 
accrued  to  date,  as  shown  by  the  Accrual  column.  This  infor- 
mation is  of  value  from  an  administrative  standpoint  as  in- 
dicating the  "margin"  available  for  the  work  yet  to  be  done 
on  the  engagement. 

Theories  of  Income 

Per  Diem  Basis.  In  connection  with  the  handling  of  income, 
some  pertinent  problems  are  met.  Some  firms  do  not  take  into 
current  income  any  earnings  until  the  work  has  been  billed  to  the 
client;  others  take  all  income  as  earned,  i.e.,  each  day's  earnings 
of  the  staff  and  other  departments  are  treated  as  income  belonging 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE  457 

to  that  day  and  to  be  taken  into  profits.  This  is  usually  spoken 
of  as  the  ''accrual"  basis  for  taking  earnings  into  the  accounts. 
Practice  in  this  regard  varies  somewhat  and  is  compHcated  by 
the  two  types  of  contracts  entered  into  with  clients.  On  per  diem 
contract  work  there  would  be  little  or  no  objection  to  booking 
the  income  as  earned  day  by  day.  In  some  cases,  however,  a 
reserve  on  all  unfinished  engagements — ranging  as  high  as  15% 
to  20% — is  set  aside  to  cover  contingencies,  the  remainder  going 
into  income.  Due  to  inability  to  supervise  in  minute  detail  all 
work  of  the  staff,  it  sometimes  happens  that  work  is  done  which 
cannot  appropriately  be  charged  to  the  client.  This  occurs  so 
infrequently  in  well-managed  organizations  as  to  make  the  prac- 
tice of  setting  aside  a  reserve  against  which  such  work  may  be 
charged  savor  of  extreme  conservatism. 

Flat  Rate  Basis.  On  the  other  hand,  on  flat  rate  contract 
work,  the  problem  is  not  so  simple.  Public  accounting  is  a 
seasonal  business,  the  5  months  of  the  late  spring  and  siunmer 
being  usually  the  slack  period.  The  peak  load  naturally  comes 
near  the  end  of  the  calendar  year  when  the  periodic  fiscal  work 
must  be  handled  and  preparations  made  for  the  tax  work.  Shift- 
ing some  of  the  burden  of  this  work  to  other  periods  of  the  year  is 
desirable.  The  flat  rate  contract  serves  this  purpose  in  a  great 
many  instances  by  making  it  possible  for  the  accountant  to  do 
some  of  the  related  work  not  wholly  dependent  on  the  entire  fiscal 
period  at  such  time  as  his  staff  is  less  strenuously  occupied. 

Under  the  terms  of  the  contract,  payment  by  the  chent  may  be 
yearly  or  periodic,  as  billed.  Just  as  in  all  flat  rate  contracting 
business,  the  degree  of  certainty  of  the  margin  of  profit  depends 
largely  on  the  care  with  which  the  estimate  is  made  and  the  back- 
ground of  experience  or  records  on  which  it  is  based.  Work  of 
this  kind  is  often  done  on  a  closer  margin  than  other  work.  To 
hold  together  a  staff  of  thoroughly  dependable  and  competent 
men  it  is  necessary  to  provide  all-the-year-round  employment. 
Unassigned  time  is  a  heavy  drain  on  profits  and  must  be  kept  at 
the  lowest  possible  point  consistent  with  holding  the  staff  together. 


458  ACCOUNTING— THEORY  AND  PRACTICE 

Accordingly  there  is  quite  a  factor  of  uncertainty  in  flat  rate 
work  and  this  often  finds  reflection  in  the  accounts  by  keeping 
this  class  of  work  separate  from  the  other.  When  kept  separate 
it  may  be  handled  in  different  ways,  the  outstanding  features  of 
which  will  be  discussed. 

1.  By  one  method  a  Flat  Rate  Contracts  account  and  a  re- 
serve are  set  up,  to  which  are  charged  and  credited  respectively 
the  costs  of  the  work  as  they  accrue.  When  the  client  is  billed 
for  any  part  or  all  of  the  work  in  accordance  with  the  terms  of  the 
contract,  the  amount  of  such  billing  is  taken  into  income  and  the 
contract  account  and  its  reserve  are  adjusted  to  the  extent  of  the 
work  billed  by  means  of  a  reversing  entry.  This,  of  course,  neces- 
sitates a  reliable  cost  system.  The  contract  account  and  its 
reserve  thus  show  by  their  balances  the  accrued  costs  on  all  such 
work  and  provide  the  basis  at  the  end  of  the  period,  either  for 
deferring  these  costs  carried  regularly  in  the  expense  accounts, 
or  for  taking  such  a  conservative  share  of  profit  on  the  work  done 
as  facts  and  experience  seem  to  justify. 

2.  Under  a  second  method  the  contract  account  and  its  re- 
serve are  charged  and  credited  respectively  at  selling  price  with 
the  services  rendered.  When  the  client  is  billed,  the  amount  of 
the  billing  is  taken  into  income  and  the  contract  account  and  its 
reserve  are  adjusted  by  the  same  amount.  The  balance  in  these 
accounts  will  show:  (a)  if  the  engagement  is  complete,  the 
amount  of  the  excess  or  deficit  of  the  flat  rate  fee  over  or  under 
the  regular  selling  price  of  the  service;  (b)  if  the  engagement  is 
not  complete  and  the  billing  is  the  sales  price  of  the  service  to 
date,  there  will  be  no  balance;  and  (c)  if  the  engagement  is  not 
complete  and  the  billing  is  an  agreec*.  simi,  as  per  contract,  the 
balance  means  nothing  unless  the  amount  of  service  rendered  to 
date  bears  to  the  total  estimated  service  necessary  the  same  ratio 
as  the  billed  amount  bears  to  the  total  contract  price.  The  two 
accounts,  however,  provide  when  the  engagement  is  complete  a 
basis  for  judging  the  sufficiency  or  insufficiency  of  the  contract 
price. 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE  459 

3 .  Under  a  third  method  the  contract  account  and  its  reserve 
are  debited  and  credited  respectively  with  the  amount  of  the 
contract  price.  As  the  chent  is  billed  the  amount  is  transferred 
from  the  contract  account  to  the  client's  account.  Accruing  costs 
are  charged  against  the  reserve,  the  balance  of  which  shows  the 
gross  profit  or  loss  on  the  contract. 

Usual  Analysis  of  Income 

These  theoretical  refinements  are  not  often  met  in  practice, 
the  accounts  more  often  providing — instead  of  the  analysis  of 
income  as  between  kinds  of  contracts — an  analysis  of  the  income 
on  the  basis  of  kinds  of  work.    Some  firms  segregate  income  thus  : 

1.  Audits 

2.  Investigations 

3.  Cost  accounting  and  systems 

4.  Tax  work 

5.  Miscellaneous 

Sometimes  costs  are  segregated  similarly  and  must  be  if  the 
relative  value  of  the  different  kinds  of  work  is  to  be  shown  by  the 
accounts.  However,  like  the  shoes  of  the  shoemaker's  family,  an 
accountant's  accounts  oftentimes  do  not  carry  the  refinements 
he  suggests  for  others.  The  size  and  type  of  the  organization  are 
the  determining  factors  here,  as  elsewhere. 

Method  of  Booking  Income 

The  method  or  medium  used  for  recording  income  will  depend 
upon  the  theories  of  income  discussed  above.  As  a  matter  of 
principle,  a  regular  accounting  routine  must  be  estabHshed  and 
adhered  to.  Thus  if  accruals  are  to  be  the  basis  of  recording 
income,  provision  must  be  made  to  bring  earnings  on  the  books 
as  they  accrue.  If  income  is  not  to  be  taken  till  the  client  is  billed, 
earnings  must  be  carried  on  memorandum  until  then.  In  this 
latter  case,  a  combination  cost  and  accrual  income  ledger  may  well 
serve  the  purpose,  to  which  postings  are  made  direct  from  the 
time  sheets  of  staff  and  office.    The  billing  record  or  journal  will 


46o  ACCOUNTING— THEORY  AND  PRACTICE 

then  be  the  medium  for  bringing  the  income  into  the  accounts. 
This  may  be  the  duplicate  invoice  loose-leaf  record  with  recapitu- 
lation sheet  for  establishing  the  control  for  the  general  ledger  and 
making  any  desired  analysis  or  the  more  formal  journal  record. 
Expenses  incurred  in  behalf  of  a  client  may  be  charged  either 
direct  to  the  client's  account  at  the  time  of  disbursement  or 
through  the  billing  record,  in  which  case  the  offsetting  credit  will 
be  to  Accountants'  Traveling  Advances,  Expense  Funds,  or  other 
suitable  account  to  which  the  original  charge  for  the  cash  ad- 
vanced was  made.  The  amount  of  expenses  chargeable  to  clients 
comes  from  the  expense  reported  by  the  accountant  as  per  weekly 
time  and  expense  sheet,  the  report  department  time  report  sheets, 
and  the  office  record  of  expenses  incurred  on  the  client's  account. 
If  a  flat  rate  for  expenses  has  been  quoted  the  client,  that,  of 
course,  is  the  basis  for  entry  to  the  client's  account. 

For  booking  income  on  an  accrual  basis  a  service  and  expense 
journal  or  earnings  accrual  record  is  used.  Entries  to  this  are 
from  the  time  and  expense  reports  of  staff  and  office  force.  Form 
12  shows  such  a  record,  which  is  combined  with  a  time  analysis 
section  for  posting  to  various  salary  accounts.  Under  each 
client's  name  are  listed  the  names  of  accountants  and  office  em- 
ployees engaged  on  the  client's  work  during  the  week.  Columns 
are  provided  for  the  time  chargeable  to  client,  the  rate  quoted, 
amount,  chargeable  expense,  and  total. 

The  sums  of  the  Amount  and  Expense  columns  are  charged 
periodically  to  the  accrual  section  of  the  client's  account,  as 
explained  on  page  462.  To  the  general  ledger,  the  total  for  the 
month  of  the  Amount  column  is  credited  to  Professional  Earnings 
account,  the  total  of  the  Expense  column  is  credited  to  Expense 
Advances  account,  and  the  total  of  the  Total  column  is  charged  to 
Unfinished  Engagements.  The  "Chargeable  Time"  and  "Ex- 
pense" are  the  same  amounts  as  those  entered  in  the  cost  ledger. 
The  entries  to  the  pay-roll  section  provide  for  distribution  to  the 
indicated  accounts.  The  total  of  this  section  is  credited  to  Pay-roll 
account;  the  distributive  columns  are  charged  to  their  respective 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE 


461 


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462  ACCOUNTING— THEORY  AND  PRACTICE 

accounts.  If  salaries  are  paid  twice  a  month,  the  entries  from  this 
time  analysis  section  should,  at  the  end  of  the  month,  just "  clear  " 
the  corresponding  pay-roll  account  or  accounts  charged  from  the 
voucher  register  or  cash  book. 

The  Clients  Ledger 

Form  13  shows  a  type  of  clients  ledger  designed  to  show  both 
accruals  and  billings .  The  two  sections  make  this  possible.  From 
the  service  and  expense  journal,  charges  are  made  to  the  Accruals 
section  of  the  various  clients'  accounts,  the  total  of  which  will  be 
charged  to  an  Unfinished  Engagements  account  on  the  general 
ledger.  When  the  cUent  is  billed — through  the  dupUcate  invoice 
record  with  recapitulation  sheet  as  explained  above — he  is 
charged  in  the  Charges  section  of  his  account  and  credited  in  the 
Accruals  section.  Periodically,  the  totals  from  the  recapitulation 
sheet  are  charged  to  Accounts  Receivable  and  credited  to  Un- 
finished Engagements  on  the  general  ledger.  Thus,  at  all  times 
the  latter  account  controls  the  Accruals  section  of  the  cHents  ledger, 
while  the  Accounts  Receivable  controls  the  Charges  section. 

The  record  for  handling  flat  rate  contracts,  if  they  are  kept 
separate  from  per  diem  work,  will,  of  course,  depend  on  the 
method  adopted,  i.e.,  the  theory  in  accordance  with  which  they 
are  to  be  handled  as  explained  above. 

Other  Records 

The  other  records  used  by  an  accounting  firm  do  not  differ 
from  those  used  elsewhere— suitable  voucher  records  to  record 
expenses  and  purchases,  and  cash  books,  petty  and  general,  for 
controlling  cash. 

Financial  Statements 

No  peculiarities  are  found  in  the  balance  sheet  of  a  firm  of 
accountants.  A  typical  form  of  profit  and  loss  statement  follows. 
The  difference  between  earnings  from  engagements  and  the  first 
or  direct  cost  of  those  earnings  corresponds  with  the  gross  profit 


ACCOUNTS  OF  PUBLIC  ACCOUNTANT'S  OFFICE 


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464  ACCOUNTING— THEORY  AND  PRACTICE 

of  a  trading  concern.  Where  income,  or  both  income  and  direct 
costs,  are  departmentized  the  customary  analysis  by  departments 
would  be  shown  in  the  statement. 

Statement  of  Income  and  Expenses 
For  the  Year  Ending  December  31,  19 — 
Income: 

Fees  for  professional  service $ 

Direct  Cost  of  Income: 

Salaries,  Accounting  and  Report  Department: 

Chargeable  to  Clients $ 

Non-chargeable,      Unassigned,      and 

Vacation 

Late  Work $ 

Traveling  Expenses  and  Subsistence  account  of 

clients  (Excess  over  amount  charged  clients) 

Miscellaneous 

Total  Direct  Costs 


Net  Accountancy  Income $ . 

General  Administrative  Expenses: 

General  Salaries $ 

Rent 

Correspondence  and  Mailing 

Postage 

Telephone  and  Telegraph 

Stationery  and  Binders 

Traveling  Expense  and   Subsistence-  - 

General 

Report  Department — General 

Library  Expense 

Clubs,  Societies,  etc 

Contributions 

Gratuitous  Work 

Depreciation 

Miscellaneous ,       $ 

Financial  Management  Expense  and  Income: 

Bad  Debts $ 

Interest  Cost $ 

Less — Interest  Income  and  Dividends        

Net  Profit $ . 


CHAPTER  XIII 

ACCOUNTING  FOR  AN  ADVERTISING  AGENCY 
By  T,  L.  Woolhouse 

Inception 

An  advertising  agency  is  usually  conceived  and  promoted  by 
one  or  more  individuals  who  have  had  either  training  and  experi- 
ence in  this  highly  specialized  service  in  another  advertising 
agency,  or  the  advertising  managership  of  some  extensively  ad- 
vertised product. 

To  obtain  recognition  from  the  associations  that  guard  the 
ethics  of  the  profession  it  is  necessary  to  have  at  least  three  sub- 
stantial accounts.  This  recognition,  when  granted,  entitles  the 
agency  to  the  usual  commissions  and  cash  discounts  allowed  by 
publishers  to  all  agencies  in  good  standing.  This  commission, 
generally  15%,  is  the  margin  of  profit  that  the  pubhsher  allows  an 
agency  as  compensation  for  services  rendered— and  is  not  allowed 
to  advertisers  who  place  their  publicity  direct. 

Development 

The  agency,  while  actually  paid  by  the  publisher  or  similar 
party  for  developing  business,  is  also  the  guardian  of  the  adver- 
tisers' interests.  The  publisher  realizes  the  value  of  the  agency 
to  him  and  often  co-operates  to  a  great  extent  to  make  the  adver- 
tising profitable  so  that  pleasant  business  relations  may  exist 
between  the  publisher  and  the  agency,  and  the  agency  and  its 
client. 

In  view  of  this,  it  is  the  duty  of  the  agency  to  fulfil  its  obliga- 
tions to  both  parties  by  being  properly  equipped  to  meet  the 
various  requirements  of  each.  To  meet  these  conditions  the 
agency  begins  operations  in  a  small  way  with  the  minimum  num- 

yoi"  III — 30  465 


466  ACCOUNTING— THEORY  AND  PRACTICE 

ber  of  clerks  that  are  required.  As  the  agency  develops,  either 
through  the  growth  of  the  initial  accounts  or  the  addition  of  other 
accounts,  the  office  staff  automatically  grows  in  number  to  meet 
the  demands  of  the  increase  in  detail  work — which  eventually 
makes  it  necessary  to  form  definite  departments. 

In  the  early  stage  of  development  the  accounting  of  the 
agency  is  not  complex.  The  agency  has  no  stock-in-trade;  its 
equipment  consists  of  office  furniture  and  supplies;  its  accounts 
receivable  are  principally  charges  made  to  customers  for  services 
rendered  or  advertising  space  in  certain  media;  its  accounts  pay- 
able represent  the  claims  of  publishers  or  others  against  the 
agency  for  space  or  services  which  the  agency  authorized  in  be- 
half of  its  clients. 

Because  an  agency  usually  grows  slowly  and  the  advertising 
business  does  not  lend  itself  readily  to  standardization  and  sys- 
tems, the  departmental  organization  is  different  in  each  agency. 
A  typical  agency  organization  is  shown  in  Form  i . 

As  methods  of  accounting  are  not  uniform,  variations  are  to 
be  found  in  the  forms  and  records  kept  in  every  advertising 
agency  office.  For  this  reason  it  is  impracticable  to  present  in 
stereotyped  form  a  system  of  accoimting  applicable  to  agency 
work  in  general.  The  logical  plan  is  to  describe  the  departmental 
organization  and  methods  of  accounting  of  an  agency  with  a  large 
clientele.  The  study  of  agency  detail  with  its  most  complex 
conditions — the  principles  of  which,  as  previously  explained,  are 
fundamentally  simple — should  give  the  student  sufficient  knowl- 
edge of  the  technical  side  of  the  business  to  make  intelligible  the 
"why  and  wherefore"  of  the  different  forms  and  methods  used. 

Functions  of  Agency  Work 

Before  taking  up  the  details  of  the  accounting  system,  it  is 
advisable  to  consider  the  duties  or  functions  common  to  all  large 
agencies  and  the  organization  required  in  their  performance. 

An  agency,  broadly  speaking,  is  the  advertising  department  of 
each  of  its  clients.    In  this  capacity  it  should  hold  itself  in  readi- 


ACCOUNTING  FOR  AN  ADVERTISING  AGENCY 


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468  ACCOUNTING— THEORY  AND  PRACTICE 

ness  to  offer  advice  or  services  for  the  betterment  of  its  clients' 
businesses.  It  should  know  every  phase  of  marketing  a  commod- 
ity or  object,  and  should  advise,  when  possible,  reduction  in 
manufacturing  cost  or  overhead  expense,  alteration  of  form  or 
dimension  of  product,  determine  selling  price,  and  act  in  a  gen- 
eral way  as  counsel  in  everything  that  affects  successful  selling. 
The  following  are  the  general  duties  of  an  agency: 

1.  Selecting  the  media,  that  is,  determining  whether  one  or 

all  of  the  following  can  be  profitably  and  practically 
used  for  advertising  purposes:  newspapers,  magazines, 
circulars,  novelties,  billboards,  electric  signs,  street- 
car cards,  personal  letters,  programs,  etc. 

2.  Preparation  of  copy  for  advertisements,   illustrations, 

plates,  novelties,  booklets,  circular  letters,  and  other 
publicity  material. 

3.  Issuing  instruction  to  publishers  and  keeping  a  record 

of  the  appearance,  space  occupied,  and  position  of 
advertisements. 

4.  Making  payments  to  publishers  or  others  for  insertions 

and  services  and  charging  the  advertiser  on  one  bill,  if 
possible,  for  the  month's  work. 

The  Agency  a  Middleman 

Such  is  the  routine  work  which  the  agency,  acting  as  a  middle- 
man between  advertiser  and  advertising  medium,  performs  for 
no  increased  cost  to  the  advertiser;  for  the  chief  income  of  an 
advertising  agency,  as  before  noted,  consists  of  the  commissions 
given  by  publishers  on  the  purchase  and  sale  of  advertising  space. 

For  example,  an  announcement  placed  direct  in  a  newspaper 
by  an  advertiser  would  be  charged  to  him  at  a  specified  rate  per 
line  and  no  service  to  speak  of  would  be  rendered.  The  same 
business  placed  through  an  advertising  agency  would  cost  the 
same  and  would  relieve  the  advertiser  of  the  task  of  writing  the 
advertisement,  attending  to  the  details  of  insertion,  checking  the 


ACCOUNTING  FOR  AN  AD\'ERTISING  AGENCY  469 

advertisements  as  they  appear,  and  he  would  receive  one  bill  at 
the  end  of  the  month  for  this  item  and  any  others  that  may  have 
been  authorized.  In  fact,  it  is  more  economical  for  the  advertiser 
to  place  his  business  through  an  agency,  for  if  he  handles  the 
business  direct  he  must  pay  for  the  services  of  a  copy-writer  and 
for  the  clerical  work  involved.  The  only  charge  of  the  agency,  in 
addition  to  the  regular  space  rate,  is  the  cost  of  any  art  work  and 
the  cuts  or  plates  if  such  are  required  to  illustrate  the  advertise- 
ment. 

Departmental  Divisions 

To  carry  out  the  functions  described  on  a  preceding  page, 
the  work  of  the  agency  is  divided  among  the  following  depart- 
ments, each  of  which  performs  a  specific  duty: 

1 .  Plan  and  Copy  9.  Auditing 

2.  Art  -  10.  Billing 

3.  Forwarding  11.  Stenographic 

4.  Printing  12.  Checking 

5.  Rates  and  Statistical  13.  Filing 

6.  Promotion  14.  Export 

7.  Mechanical  15.  Recording 

8.  Bookkeeping 

Some  of  these  functions  are  common  to  all  businesses  and 
require  no  description.    Others  need  brief  explanation. 

Plan  and  Copy  Department.  This  is  the  factory  of  ideas, 
where  originate  the  form  and  matter  for  all  advertisements. 
Trained  writers  prepare  the  text  matter,  which  is  often  adapted  to 
certain  illustrations  furnished  by  the  advertiser.  In  many  other 
cases  the  text  is  the  foundation  upon  which  an  illustration  may  be 
built. 

Art  Department.  The  work  of  this  department  is  to  prepare 
drawings  or  paintings  from  the  "layout"  received  from  the  copy 
department.  This  department  also  attends  to  the  making  of 
plates  and  the  design  and  purchase  of  printed  matter.     The 


470       ACCOUNTING— THEORY  AND  PRACTICE 

plates  consist  of  electros,  zincs,  stereotypes,  half-tones,  matrices, 
etc., — terms  that  are  defined  at  the  end  of  this  chapter. 

Forwarding  Department.  This  department's  duties  consist 
of  mailing  to  the  publisher  the  completed  copy  of  the  advertise- 
ment with  instructions,  and  the  electrotypes  or  matrices  to  be 
used. 

Printing  Department.  This  department,  where  it  exists, 
prints  catalogues,  booklets,  street-car  cards,  folders,  multigraphed 
letters,  etc.,  depending  upon  the  extent  of  its  equipment.  The 
majority  of  agencies  turn  over  this  work  to  outside  printers. 

Rates  and  Statistical  Department.  The  publications  for  the 
advertising  campaign  are  selected  and  a  file  of  publishers'  rate 
cards  and  circulation  reports  is  maintained  by  this  department, 
whose  duty  it  is  to  select  the  publications  or  media  that  are  best 
fitted  to  meet  requirements  of  the  contemplated  campaign.  Con- 
tracts are  made  with  different  publications  for  a  certain  amoimt  of 
space  to  be  used  within  a  year  or  a  shorter  period. 

Promotion  Department.  This  department  solicits  new  busi- 
ness through  correspondence  and  personal  interviews,  developing 
"prospects"  into  clients. 

Mechanical  Department.  Here  electrotypes,  matrices,  original 
zincs,  etc.,  are  made  if  the  equipment  includes  that  of  a  foundry 
for  ruaking  electrotypes,  and  a  hydraulic  steam  press  for  the 
making  of  matrices.  Such  work,  however,  is  more  commonly 
entrusted  to  outside  concerns. 

Bookkeeping  and  Auditing  Departments.  The  functions  of  the 
bookkeeping  department  call  for  no  special  mention.  The  audit- 
ing department  makes  payments  to  the  publishers  and  other 
creditors  for  the  space  used.  Such  creditors  as  a  rule  render  their 
invoices  on  the  30th  of  each  month  for  the  current  month's 
advertising.  Some  invoices  are  due  on  the  loth  of  the  month 
following  service,  others  on  the  15th  or  the  20th,  with  a  cash  dis- 
count for  prompt  payment.  The  auditors  file  the  bills  in  their 
respective  discount  order  and  immediately  commence  to  audit. 
The  duplicate  of  the  original  order  is  referred  to,  the  space  is 


ACCOUNTING  FOR  AN  ADVERTISING  AGENCY  47 1 

tabulated  and  checked  against  publishers'  invoices,  and,  if  cor- 
rect, settlement  follows  in  due  course. 

Checking  Department.  The  verification  of  the  appearance  of 
advertisements  in  periodicals,  newspapers,  street-cars,  or  on 
billboards  is  entrusted  to  this  department.  Newspaper  and 
magazine  advertisements  have  to  be  measured  and  the  position 
ordered  or  requested  for  an  advertisement  needs  to  be  verified. 
The  measurement  of  newspaper  advertisements  is  determined  by 
what  is  termed  "agate  measurement,"  in  which  14  lines  equally 
spaced  constitute  an  inch  one  column  wide.  Regardless  of  the 
type  or  illustration,  the  measurement  of  display  advertisements 
is  taken  from  the  black  rule  at  the  top  to  the  one  at  the  bottom  of 
each  advertisement.  If  the  advertisement  is  6  inches  high  and 
extends  across  three  columns,  the  space  occupied  would  measure 
252  lines.  Advertising  rates  are  based  on  lines  or  pages.  If 
special  positions  or  pages  have  been  ordered  the  checking  clerks 
must  detect  any  irregularity  in  this  matter,  as  well  as  in  the  gen- 
eral appearance  of  each  advertisement.  Usually  the  rate  and 
statistical  department's  order  for  space  covers  a  yearly  or  season 
schedule.  In  checking  advertisements,  the  paper  is  examined 
thoroughly,  each  client's  advertisement  is  noted,  and  its  measure- 
ments and  location  are  marked  on  a  customer's  checking  card  to 
be  described  later.  Often  advertisements  are  omitted  through 
oversight  or  carelessness,  and  as  soon  as  discovered  the  matter  is 
taken  up  with  the  publisher  and  another  date  of  insertion  is 
arranged  for. 

Filing  Department.  This  department  contains  the  usual 
general  correspondence  file  and  also  a  newspaper  and  magazine 
file.  After  newspapers  and  other  periodicals  have  been  checked 
they  are  filed  in  bins  or  racks  alphabetically  by  states  and  cities 
and  for  the  larger  cities  in  a  separate  compartment  for  each 
paper. 

Export  Department.  This  department  deals  with  the  promo- 
tion of  foreign  advertising  and,  where  it  exists,  is  operated  as  a 
branch  business.    Few  advertising  agencies  have  such  a  depart- 


47^ 


ACCOUNTING— THEORY  AND  PRACTICE 


ment,  the  placing  of  advertisements  in  foreign  countries  usually 
being  done  through  special  agencies. 

Recording  Department.  Upon  the  completion  of  the  month's 
advertising  schedule,  the  checking  cards  (Form  5)  are  passed  to 
this  department  for  the  purpose  of  recording  on  the  contract  sheet 
(Form  6)  the  value  of  space  utilized  and  thus  have  these  data  in 
order  to  check  the  publishers'  bills. 

Books  of  Account — Cash  Book  Ruling 

The  accounting  work  in  an  advertising  agency  differs  from 
that  of  a  mercantile  house  chiefly  in  the  method  of.  handling  the 


Dr. 

Dite 

DETAILS 

Ledg. 
Fol. 

Accounts  ReceWiMe 

Discount 
Allowed 

p«pcr 

|,C0t3.P»J 

General 
Udger 

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Form  2.     (a)   Cash  Book  (debit  side) 


Cr. 

Pate 

DETAILS 

Voucher 

Ledg. 
Fol. 

Xewspaper  Accounts  Pkjible 

Sundry 
Accounts 
P«j«l)le 

Discount 
Eimed 

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Form  2.     (b)   Cash  Book  (credit  side) 


sales  records.  The  sales  of  the  agency  consist  of  advertising 
space  sold  to  its  customers  and  purchased  from  publishers  who 
hold  the  agency  responsible  for  payment.  For  space  sold,  the 
client  is  charged  and  an  income  account,  Advertising  Sales,  is 


ACCOUNTING  FOR  AN  ADVERTISING  AGENCY  473 

credited.  To  record  the  charge  made  by  the  publisher  for  this 
same  space,  an  account,  Advertising  Cost,  is  charged  and  the 
publisher  is  credited.  These  credits  are  carried  in  the  general 
ledger  controlling  account,  Newspaper  Accounts  Payable.  Since 
many  cash  adjustments  are  made  with  both  customers  and  pub- 
lishers, provision  is  made  in  the  cash  journals  (Forms  2a  and  b) 
for  making  columnar  analysis  of  these  and  other  items  for  con- 
venience in  handling  the  control  accounts. 

The  accounting  methods  of  an  agency  differ  from  standard 
methods  in  that  special  records  must  be  kept  for  the  purpose  of 
insuring  the  correctness  of  the  charges  to  clients  and  for  the 
purpose  of  checking  up  the  bills  received  from  publishers  and 
other  creditors.  The  features  of  this  system  that  might  confuse 
the  uninitiated  can  best  be  made  clear  by  describing  the  ofHce 
routine,  beginning  with  the  preparation  of  copy  and  the  contract 
•  for  space. 

Advertising  Rates 

A  large  advertising  agency  may  utilize  space  in  several 
thousand  media  and  every  publication  has  its  own  rate,  depending 
upon  the  size  and  quality  of  its  circulation.  The  rates  of  news- 
papers also  vary  for  different  classes  of  advertisements.  To  keep 
record  of  these  various  rates  a  file  of  publications  is  maintained, 
arranged  geographically  and  by  class  of  periodical.  The  file 
consists  of  a  number  of  stout  manila  envelopes — one  for  each 
publication.  On  the  outside  of  the  envelope  is  noted  the  rate 
(per  page,  half-  and  quarter-page,  etc.,  of  a  magazine,  or,  if  a 
newspaper  the  rate  per  agate  line  for  different  styles  of  advertise- 
ments), the  agent's  commission,  and  the  cash  discount.  Inside 
the  envelope  is  filed  the  latest  rate  card  of  the  publisher,  data  as 
to  the  circulation,  and  any  correspondence  relative  to  a  change  in 
rates  or  to  special  terms. 

Though  most  publications  have  fixed  rates  and  usually  offer 
an  extra  discount  for  a  series  of  advertisements,  it  does  not  follow 
that  these  fixed  rates  are  "rock  bottom."     If  an  advertising 


474 


ACCOUNTING— THEORY  AND  PRACTICE 


agency  has  sufficient  business  to  contract  for  a  large  amount  of 
space,  it  can  sometimes  secure  special  terms  or  special  positions 
or  both.  Especially  does  this  hold  true  of  the  less  important 
periodicals. 

Preparation  of  an  Advertisement 

In  the  preparation  of  an  advertisement  the  first  step,  after 
securing  a  rough  sketch  and  layout  from  the  plan  and  copy  de- 


Job  No.  ?0i8                                      REQUISITION                                     February  2    ig  — 
WRITING  and  DESIGNING  BUREAU 
Please  Prepare  Copy  as  Follows 
For    Brown" a  Bottling  Company          pndOhnrKo       **""* 

1 

No. 

FCB. 

Size  Space 

Description  or  Publicatloni 

Wanted 

DeUveredto 

S  S.C. 

Submit  pmcil  tketchfor  O.K. 

Strang  Headittg  Ditplay 

••Srozvn'BBottUm" 

t/m 

Fumithed  Drawing  wanted  with  1 

original  plau  and  1  electro.  Hold 

original  zinc 

Set  matter  herewith  and  tend  com- 

plete electro  to  the  newepaper 

IN.  Y.  Ttmet) 

Complete  plate  to 

J.H.J.  *ln 

L_ 1 

1 . 1 

1                     

Remarks    Pencil  sketch  O.K.  Sill 

Finished                                                                                     Ordered  b7  J. H.J. 

Form  3.     (a)  Requisition  Job  Order  {face) 

partment,  is  to  make  out  a  requisition  (Form  3)  on  the  art  de- 
partment, specifying  the  nature  of  the  work  to  be  done.  Such  a 
requisition  constitutes  a  job  order  and  its  function  is  to  collect 
the  costs  of  an  advertisement  or  of  a  series  of  advertisements. 
The  copy  of  large  advertisers  is  usually  changed  for  each  inser- 


ACCOUNTING  FOR  AN  ADVERTISING  AGENCY 


475 


tion  and  when  a  contract  is  made  for  a  number  of  insertions  it  is 
customary  to  prepare  several  advertisements  and  deliver  them  to 
the  publisher  some  time  before  the  closing  date  for  the  first  of  the 
series.  On  the  face  side  of  the  job  order  (Form  3a)  appear  the 
necessary  working  instructions  for  the  advertisements  to  be 
prepared,  and  on  the  reverse  side  (Form  3b)  are  entered  the  cost 
of  any  drawings  or  cuts,  and  other  special  work. 

As  the  advertiser  usually  pays  for  illustrations  and  cuts  it  is 


Brown's  Bottling  Company                                                      No        70h8 

Order 
No. 

i 

Date 

COST 

■-> 

CHARGE 

ITiSS 

A 

tjto 

Jonei  drg.  in  ink 

XX 

XX 

A 

Dravnng  layout  and  finished  pen  and  ink 

drawing  for  dieplay  "Brown'e  Bottlea" 

t7iTS 

B 

tjtt 

Smith  Zme  line 

for  xue  in  s'e.c.  newepaper  advertise- 

plate 

X 

XX 

ment. 

XX 

XX 

iriw 

C 

tjtr 

Hall  Ptg.  Co.  compo. 

X 

XX 

B 

1  Zinc  line  plaU  of  above  drawing 

X 

XX 

irsoi 

D 

tits 

BaU  EUc.  Co.  lEB 

XX 

c 

Composition  for  s'e.e.  newspaper  ad- 

vertisement "Broum/s  Bottles  are  the 

XX 

Best"  with  SO  proofs. 

X 

XX 

0 

1  Electro  ofcompleU  advi.  s's.e. 

newspaper  as  above  for  insertion  in 

N.Y.  Times-l/l. 

X 

XX 

_ 

— 

_ 

-^ 

j 

=--= 

-= 

— 

- 

— 

"~- 

Net  Total 

XX 

XX 

XX 

XX 

Aporoved          T.L.  W.          To  Bkknir.  D. 

ipt.        4/7 JnTimnl 

1 

Form  J .     (b)  Requisition  Job  Order  (reverse) 

necessary  to  distinguish  between  the  intricate  method  of  handHng 
by  the  agency  and  the  simphfied  method  of  making  the  charge  to 
the  advertiser.  This  distinction  is  made  by  dividing  the  requisi- 
tion into  two  sections,  one  section  showing  the  numerous  detail 
operations  required  of  the  agency  and  the  other  the  non-technical 


476  ACCOUNTING— THEORY  AND  PRACTICE 

and  easily  understood  charge  to  the  advertiser.  After  the  charges 
have  been  entered  on  the  requisition  it  is  passed  to  the  book- 
keeping department,  where  the  following  entries  are  made: 

Writing  and  Designing,  Requisition  7048 $ 

Sundry  Accounts  Payable $ 

Brown's  Bottle  Company 

Writing  and  Designing,  Requisition  7048 

Commission  Earned 


The  requisition  is  then  filed  by  job  number,  and  the  number 
is  posted  to  the  customer's  account  for  reference  purposes. 

Placing  and  Checking  the  Advertisement 

The  forms  used  to  check  advertisements  placed  with  pub- 
lishers consist  of  an  order  form  made  out  in  triplicate  (see  Forms 


AHv>f».i.r        Brovm'a  Botaing  Co. Publisher  ot. 

Town Maywood State  N.J.  Town 

Edition Daily Space  '  inches 

Pftaition     Top  of  column  next  to  reading  matter 


_Charg:e  us  *     -XX  line        GroM  tXXKno        Net  Cub  Diac't._X_3L 


D^be  February  tf  19 —    Ramarla       Commmeeatnnee 


GAMUT  NATIONAL  AGENCY 

Blain  Office, 

NEW  YORK, 

Gentlemen:- 

You  will  please  publish  as  per  instructions  herewith  or  on  copy  the  advertising  as  above  schedaled. 
/  t^lTteertion  in  part  o/ieaue  of  any  date  or  'No.*  will  not  be  accepted,  \ 

*         Thisadv'g.  to  he  printed  alike  IN  EVERY  COPY,  of  every  daU  or  'No.'  ordered.) 

Papers  to  be  sent  to  us  regularly  during  term  of  thia  contract.  Also  insertion  to  the 

advertisers  direct. 

Please  signify  your  acceptance  promptly  by  signing:  and  returning  attached  duplicate.  EHectrotypes 
will  then  be  forwarded.  Do  not  set  this  advertising  up  in  type. 

Yours  very  truly, 

GAMUT  NATIONAL  AGENCY 
P"-  


Form  4.     (a)  Order  Form  (original) 


ACCOUNTING  FOR  AN  ADVERTISING  AGENCY  477 

4a  and  b  and  the  upper  right-hand  corner  of  Form  6),  a  checking 
card  (Form  5),  and  copy  schedules  (Forms  8  and  9).  The  original 
is  an  order  on  the  newspaper  to  run  the  advertisement,  in  this 
case  of  the  Brown  Bottle  Company,  daily  for  a  period  of  two 
months,  in  the  space  of  3  inches,  in  full  position,  and  at  the  terms 
and  rates  specified.  The  original  and  duplicate  are  sent  to  the 
publisher,  who  signs  and  returns  the  duplicate  as  an  acknowledg- 
ment of  the  terms  and  conditions  of  the  order.  The  third  copy 
(Form  6)  is  filed  in  a  binder  in  geographical  order  and  contains 
the  rates  to  be  charged .  the  customer,  also  numerous  squares 
one  for  each  day  of  the  year,  for  entering  the  insertions  given 
An  extract  of  the  heading  of  this  form,  showing  the  date, 
paper,  position,  length  of  contract,  space,  and  insertion  dates, 


Advertiiiar        Brovm't  Bottling  Co. Publiaher  of  Times 

Town Maywood State  N.J.  Town New 


Edition Daily Space 3  inches Period  of  *  Months 

Pnaitinn         Top  of  column  next  to  reading  matter 


_Charge  us  S     -XX    line        nrom  I  -XX  line    Tj^t  Cash  Di8C't_X*_ 


Date  February  t7  19  _      Remarlta       Commence  at  once 


READ  CAREFULLY 
To   make  this  order 
T»lid  tnd   to   Insure 
proper  attention   to 
jour  blllE  for  tlie  ser* 
vice  this  acceptance 
must  be  SIGNED  and 
ilETURNED  imme- 
diately with  Prices 
tilled  m. 


GAMUT  NATIONAL  AGENCY 

Main  Office, 

NEW  YORK, 

GAMUT  NATIONAL  AGENCY 
New  York,  N.Y. 

Your  order  received  and  we  hereby  accept  yonr  contract  ana  will  publish  as  per  instructions  the 
advertising  as  above  scheduled. 

(E^S~/7t*crtton  in  parto/issve  0/ any  date  or  'No.'  unit  not  be  accepted,  \ 

This  adv'g.  to  be  printed  alike  IN  EVERY  COPY,  of  every  daU  or  'No.'  ordered/ 

We  will  send  papers  regularly  to  you  during:  term  of  this  contract.  Also insertion  to 

advertisers  direct. 

Publishers  of 

Town 


WE  AWAIT  1ELECTR0TYPES  BEFORE  INSERTING. 


Form  4.     (b)  Order  Form  {duplicate) 
To  be  signed  and  returned  by  publisher 


478 


ACCOUNTING— THEORY  AND  PRACTICE 


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Fil.it7,19~                             N.Y.                       New  York                                       Times 

Top  of  columnnext  to  reading  matter                                                             Broum's  Bottling  Co. 

Daiiy                                                                   j  inches                                                     t  Months 

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ACCOUNTING  FOR  AN  ADVERTISING  AGENCY  479 

is  entered  on  the  upper  left-hand  corner  of  a  checking  card 
(Form  5). 

The  agency  must  check  accurately  all  media  used  in  order  to 
make  sure  that  contracts  with  publishers  are  carried  out  as  agreed. 
Publishers  must  send  the  agency  copies  of  all  media  from  which 
the  advertising  placed  therein  by  the  agency  can  be  checked. 
The  checking  card  is  used  for  this  purpose.  It  consists  of  twelve 
colmnns,  one  for  each  month  of  the  year.  Each  column  is  sub- 
divided into  three  smaller  columns,  of  which  column  one  is  used 
to  designate  the  number  of  the  advertisement,  column  two  con- 
tains information  as  to  the  size  of  the  advertisement  and  remarks, 
and  column  three  is  used  exclusively  for  missing  papers.  These 
columns  are  cross-ruled  and  contain  squares  for  each  day's 
advertisement.  The  checking  cards  are  filed  in  the  same  manner 
as  all  advertising  matter,  viz.,  by  states,  cities,  classification  of 
paper.  Each  day's  mail  is  sorted  by  states  and  these  in  turn,  are 
arranged  in  cities  according  to  the  alphabet.  The  papers  thus 
sorted  must  correspond  with  the  checking  cards.  The  advertise- 
ments are  marked  with  a  heavy  crayon  and  noted  on  the  checking 
cards  in  their  respective  columns  and  dates.  It  will  be  noted  upon 
reference  to  Form  5  that  under  date  of  March  5  no  paper  was  re- 
ceived; the  Brown  Bottle  advertisement  was  inserted  in  wrong 
position  on  the  15th  and  was  also  omitted  on  the  27th.  At  the 
conclusion  of  the  day's  checking,  the  papers  are  alphabetically 
filed  in  bins  for  future  reference.  These  cards  are  totaled  at  the 
end  of  each  month  and  entered  on  the  contract  sheet  (Form  6) 
together  with  notations. 

Form  6  is  the  basis  for  the  charge  to  the  client  and  also  con- 
trols the  agency's  liability  to  the  publisher  for  the  space  used.  The 
gross  monthly  cost  to  the  advertiser  is  set  up  in  a  column  from 
which  the  customer  is  billed.  A  column  is  provided  also  to  en- 
able auditors  to  determine  in  which  month  this  billing  was  made. 
A  similar  column  is  provided  to  show  the  exact  cost  to  the  agency. 
Supporting  Form  6  is  Form  5  giving  the  original  check-up  of  the 
insertions  on  the  basis  of  which  both  the  charge  to  the  advertiser 


48o 


ACCOUNTING— THEORY  AND  PRACTICE 


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ACCOUNTING  FOR  AN  ADVERTISING  AGENCY  481 

and  payment  to  the  publisher  are  made.     The  importance  of 
these  forms  is  apparent. 

Newspaper  Accounts  Payable 

As  the  invoice  rendered  by  a  publisher  often  covers  the  ad- 
vertisements of  several  of  the  agency's  clients,  it  is  necessary  to 
divide  the  charge  into  its  component  parts  for  the  purpose  of 
applying  them  against  the  debits  of  individual  customers'  ac- 
counts. The  analysis  is  made  upon  a  simple  voucher  form.  The 
source  of  the  information  for  making  the  analysis  is  found  in  the 
M.  I.  A.  Cost  column  of  Form  6.  The  total  charge  on  any  pub- 
lisher's bill  must  reconcile  with  the  total  M.  I.  A.  Cost  columns, 
commissions  to  be  considered,  for  all  the  advertisers  covered  by 
the  bill. 

Ledgers 

The  customers  ledgers,  in  which  are  entered  the  agency's 
charges  to  its  clients,  call  for  no  comment.  The  publishers 
ledgers,  as  illustrated  in  Form  7,  are  ruled  to  show  the  month 
covered  by  the  invoice  in  order  to  ascertain  the  amounts  due  and 
paid.  The  study  of  Form  7  will  be  self-explanatory  in  the  light 
of  the  preceding  discussion. 

Billing  Customers 

A  schedule  is  maintained  in  the  billing  department  which  per- 
mits certain  customers  to  be  billed  each  day.  This  uniformly 
divides  the  work  and  also  sends  the  client  ''invoice  for  services" 
at  about  the  same  date  each  month.  The  contract  sheet  (Form 
6)  filed  in  binders  under  the  captions  of  Customers,  States,  Cities, 
etc.,  is  the  source  for  billing  customers  for  the  month's  completed 
services.  The  rates  and  other  information  are  noted  on  the  order 
sheet  in  a  prominent  corner.  On  the  customer's  invoice  the  ad- 
vertising space  is  tabulated  and  priced  at  the  rate  quoted.  The 
space  is  then  rechecked  and  is  ready  for  billing.  The  service  given 
is  itemized  by  dates,  space,  and  rates  for  each  periodical  in  order 
vot  "' — *' 


482 


ACCOUNTING— THEORY  AND  PRACTICE 


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ACCOUNTING  FOR  AN  ADVERTISING  AGENCY  483 

that  the  client  may  verify  the  invoice  readily.  After  all  charges 
have  been  verified  a  copy  of  the  invoice  is  placed  in  an  invoice 
book  or  in  a  loose-leaf  binder  and  the  original  is  forwarded  to  the 
bookkeeping  department  for  entry  and  mailing  to  the  client.  A 
recapitulation  of  these  invoices  gives  the  amount  to  be  entered  to 
the  general  ledger  control  account. 

Other  Forms 

Two  other  forms  peculiar  to  an  advertising  agency  business 
are  shown  and  described. 

The  copy  schedule,  illustrated  in  Form  8,  is  the  record  kept  by 
the  agency  of  the  copy  sent  to  newspapers.  When  dispatching 
copy  a  check  mark  is  made  in  the  squares  representing  the  days 
of  the  month  on  which  the  copy  is  to  appear  in  the  newspaper 
named  in  the  second  column.  Advertisers'  names  are  listed  on 
the  sheets  alphabetically  for  convenient  reference,  and  the  sheets 
are  scanned  daily  to  see  that  the  necessary  copy  is  supplied  the 
pubHsher. 

The  somewhat  different  style  of  schedule  illustrated  in  Form 
9  is  used  to  keep  track  of  the  copy  sent  to  magazines  or  other 
monthly  pubUcations.  Users  of  magazine  space  commonly 
advertise  regularly  in  many  media.  For  this  reason  a  separate 
sheet  ruled  to  cover  a  year's  advertising  is  allotted  to  each  maga- 
zine advertiser.  The  study  of  Form  9  will  make  clear  the  method 
of  its  operation,  with  the  exception  perhaps  of  one  point — the 
letters  in  the  first  column.  These  letters  refer  to  a  series  of  ad- 
vertisements and  are  used  to  distinguish  one  piece  of  copy  or 
illustrated  matter  from  another. 

Closing  the  Books 

Few  complexities  are  met  in  closing  the  books  of  an  agency. 
Bad  debts,  depreciation,  and  all  deferred  and  accrued  items  must 
be  taken  into  account.  The  only  inventories  are  those  of  materi- 
als and  supplies,  which  are  usually  small  and  are  often  disre- 
garded.    Because  of  the  practice  of  charging  to  the  client  all 


484 


ACCOUNTING— THEORY  AND  PRACTICE 


costs,  as  soon  as  incurred,  the  costs  preliminary  to  the  inaugura- 
tion of  a  campaign,  for  copy,  illustrations,  etc.,  have  all  been 
charged  and  perhaps  collected  before  the  campaign  starts.  There- 
after only  charges  for  space  are  made  against  the  client  and  these 
are  made  monthly.  At  the  end  of  the  fiscal  period  all  accrued 
charges,  not  yet  billed  to  customers,  are  taken  cognizance  of. 


Name,  Sherburne  Manufacturing  Co 

GAMUT  NATIONAL 
.  Address.       SaZew,  N.J. 

DesignB.  Copy,  Etc, 

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Amt.  Space 
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Rate 

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Also  material  in  process,  where  preparations  for  the  campaign 
have  not  yet  been  completed,  should  be  taken  into  account, 
usually  on  a  cost  basis.  Costs  of  each  job  or  contract  are  very 
carefully  kept,  being  accumulated  through  the  various  depart- 
ments of  work  by  means  of  the  envelope  system.  Such  costs  are 
carried  currently  in  the  account.  Writing  and  Designing,  from 
which  they  are  charged  to  the  client  when  the  job  is  completed. 

Glossary 

To  complete  the  discussion  of  advertising  agency  accounting, 
a  glossary  follows  of  the  technical  terms  employed  in  advertising 
work  with  which  terms  the  accoimtant  should  be  familiar. 


Original  Plate  (often  a  zinc).  This  plate,  known  as  a  "pattern" 
plate,  is  made  of  especially  prepared  metal  from  which  any  number  of 
electrotypes  or  matrices  may  be  made.  An  electrotype  may  also  be  recast, 
but  as  it  is  once  removed  from  the  original  plate,  the  printing  will  not  be 
as  distinct  as  from  the  original  plate. 


ACCOUNTING  FOR  AN  ADVERTISING  AGENCY 


485 


Matrix.  A  mold  of  a  printing  plate  with  the  appearance  of  cardboard, 
made  of  asbestos  and  fiber.  By  placing  the  substance,  resembling  a 
blotter,  on  the  face  of  the  electrotype  or  original  cut  and  then  lowering  a 
hydraulic  steam  press  of  several  tons'  pressure  on  the  soft  blotter  material 
it  is  steamed  and  pressed  in  such  a  way  that  it  dries  and  becomes  quite 
brittle.  Another  method  is  to  clamp  the  soft  material  on  the  face  of  the 
plate  and  beat  it  with  a  two-handled  stiff  bristled  brush  weighing  about  8 


AGENCY,           New  York 

Business      ■^'"^  Novelties,  etc. 

Dec. 

Jan. 

Feb. 

Mch. 

April 

May 

June 

July 

Aiig. 

Sept. 

Oct. 

Nov. 

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Monthly  Publications 


pounds  until  the  impression  of  the  cut  has  been  made  in  the  fibrous  sub- 
stance. 

Stereotype.  The  cast  obtained  from  a  matrix  by  placing  the  matrix 
upon  a  flat  steel  plate  with  sides  about  3/i6ths  of  an  inch  high,  which  are 
closed  in  to  fit  the  size  of  the  matrix.  A  second  flat  steel  plate  is  placed  on 
the  top  and  the  steel  sides  referred  to  separate  both  surfaces  about  3/i6ths 
of  an  inch.  Into  this  receptacle  a  composition  of  lead,  zinc,  and  other  sub- 
stance is  poured,  and  allowed  to  run  over  the  face  of  the  matrix.  When  the 
metal  cools  and  hardens  it  assumes  the  same  outlines  as  the  matrix,  and 
is  known  as  the  "stereotype."  Many  stereotypes  may  be  made  from  a 
single  matrix. 

Screen.  The  examination  of  the  surface  of  a  newspaper  or  magazine 
illustration  shows  it  to  be  covered  with  a  number  of  small  dots  known  as 
the  "screen."  Without  these  minute  indentations,  the  fine  details  of  an 
illustration  would  be  smudged.  In  making  plates,  screens  of  different 
sizes  are  used;  for  instance,  newspapers  require  relatively  coarse  screens — 
from  65  to  85  lines  of  dots  to  the  inch  for  the  best  effect — whereas  maga- 
zines which  print  on  calendered  or  coated  paper  require  120  or  133  screen 
and  often  higher. 

Wood  Cut.  Illustration  carved  on  wood.  This  method  produces  the 
sharpest  printing  effect. 


486  ACCOUNTING— THEORY  AND  PRACTICE 

Half-Tone.  a  plate,  the  printing  from  which  resembles  a  photograph. 
The  effect  is  produced  by  etching  the  plate  that  has  received  the  photo- 
graphic picture  through  a  fine-ruled  glass  screen.  The  screen  may  have 
from  55  to  200  lines  of  dots  to  the  inch. 

Key.  The  method  of  distinguishing  the  replies  received  from  different 
advertisements,  usually  by  a  slight  change  in  the  address  given  in  each 
case. 

Medium.    Thereon  or  whereon  the  advertising  copy  appears. 
Copy.    An  exact  duplicate  of  the  advertisement  or  advertisements  to 
appear.    Usually  when  the  copy  is  changed  for  each  insertion,  the  series 
of  advertisements  is  put  up  in  handy  book  form. 

Mortise.  A  space  cut  into  the  electro  to  permit  the  insertion  of  other 
matter. 

Plates.    A  general  term  covering  cuts  of  all  kinds. 
Rate  Card.    A  card,  sheet,  or  folder  giving  advertising  rates,  width 
and  length  of  columns,  etc. 

Readers.  An  advertisement  in  regular  reading  form  resembling  news 
matter  inserted  in  the  news  columns. 

Agate  Line.  i/i4th  of  an  inch  and  the  accepted  unit  of  measurement 
of  advertising  space. 

Em.  i/6th  of  an  inch  and  the  unit  of  measurement  of  column  widths. 
Newspaper  columns  are  usually  13  ems  or  2  1/6  inches  wide. 

Classified.     Advertising  set  solid,  no  part  being  made  dominant. 
Display.    Advertising  which  is  illustrated  or  in  which  certain  points 
are  featured  by  larger  type. 

Electrotype.  A  copper-covered  duplicate  of  type  or  illustrated 
matter,  usually  made  with  a  wooden  or  metallic  base,  and  used  to  print 
from  in  place  of  the  original  type  form. 

Flat  Rate.    A  fixed  rate  charged  regardless  of  the  amount  of  space 
used  or  the  period  of  time  of  the  order. 
D.orE.  D.     Daily. 

E.  O.  D.     3  insertions  in  one  week  (every  other  day). 
2  T.  A.  W.     Two  times  a  week. 
E.  O.  M.     Every  other  month. 
S.  C.     Single  column  in  width. 
D.  C.     Double  column  in  width. 
T.  C.     Triple  column  in  width. 
T.  F.     Until  forbidden. 

Full  Position.  An  advertisement  inserted  at  the  top  of  a  column 
next  to  reading  matter  or  an  advertisement  inserted  following  and  next  to 
reading  matter. 


ACCOUNTING  FOR  AN  ADVERTISING  AGENCY  487 

Island  Position.  An  advertisement  entirely  surrounded  by  reading 
matter,  the  choicest  position  in  advertising. 

N.  R.  M.  Signifies  that  the  advertisement  is  to  appear  next  to  reading 
matter. 

R.  O.  P.  Signifies  that  the  advertisement  may  be  placed  in  any  part 
of  the  paper  at  the  publisher's  option,  that  is,  have  the  "  run  of  paper." 

Position  Requested.  This  signifies  that  R.  O.  P.  rates  have  been 
used  and  that  the  advertising  is  to  be  accorded  any  position,  which  may  be 
given  at  the  paper's  discretion.  Position  may  be  requested  on  the  woman's 
page,  sporting  section,  financial  section,  or  other  desirable  location,  but 
the  publisher  cannot  be  held  liable  if  this  location  is  not  given. 


CHAPTER    XIV 

HOTEL   ACCOUNTING 
By  Roy  B.  Kester 

Nature  of  Business 

The  business  of  a  hotel  is  to  room,  feed,  and  administer  to  the 
varying  wants  of  its  guests.  UnHke  a  mercantile  concern,  its 
stock-in-trade  consists  solely  of  food  and  supplies  which  at  most 
will  last  only  a  couple  of  weeks.  It  derives  its  income  from  a 
number  of  sources,  the  most  important  of  which  are  income  from 
the  rent  of  rooms;  from  meals  served  in  the  dining  room,  restau- 
rant, or  in  any  other  public  or  private  rooms;  from  the  sale  of 
mineral  waters  and  cigars;  from  a  barber  shop,  flower  room,  soda 
fountain,  bootblack  and  newsstands;  and  from  various  other 
secondary  lines  under  the  direct  management  of  the  hotel;  or 
from  rents  received  from  concessionaires,  if  the  foregoing  sales 
privileges  are  leased  to  outsiders — as  is  the  more  common  prac- 
tice. In  the  latter  case  the  management  is  relieved  of  a  great 
deal  of  worry  connected  with  these  minor  operations  and  at  the 
same  time  secures  for  guests  the  certainty  of  prompt  and 
courteous  service. 

There  is  generally  an  agreement  with  these  concessionaires, 
when  they  are  not  under  the  direct  management  of  the  hotel, 
whereby  guests  may  receive  credit  and  have  purchases  charged 
to  their  accounts  on  the  hotel  books.  The  hotel  reimburses  the 
concessionaire  for  all  such  purchases.  The  concessionaire,  how- 
ever, has  some  responsibility.  He  must  make  sure  that  the  pur- 
chaser is  in  fact  a  guest  at  the  hotel,  for  the  hotel  does  not  obligate 
itself  to  pay  any  accounts  other  than  those  of  actual  guests.  He 
must  take  this  risk,  but  beyond  this  point  the  hotel  assumes  all 


HOTEL  ACCOUNTING  489 

responsibility.     If  for  any  reason  the  guest  does  not  pay  his 
account,  the  loss  is  borne  by  the  hotel. 

In  the  United  States  there  are  four  types  of  hotels. 

1.  Those  run  on  the  American  plan. 

2.  Those  using  the  European  plan. 

3.  Those  combining  both  systems. 

4.  The  so-called  "apartment"  hotel,  where  suites  of  rooms 

either  furnished  or  unfurnished  are  rented  for  more 
or  less  extended  occupancy,  while  a  restaurant  is 
maintained  in  the  building  for  the  convenience  of 
guests. 

Under  the  European  plan,  on  which  practically  all  foreign  and 
many  American  hotels  are  run,  the  guest  pays  separately  for  room 
and  for  the  meals  ordered.  Under  the  American  plan  the  guest 
pays  a  certain  amount  a  day  for  bath,  room,  and  meals.  When 
the  hotel  is  run  on  the  European  plan  and  the  guest  orders  a 
meal  either  he  pays  the  waiter  who  must  account  to  the  cashier, 
or  he  signs  his  order,  which  is  then  charged  to  his  account.  If 
the  guest  is  not  rooming  in  the  hotel,  the  waiter  must  have  the 
head  waiter's  approval  before  permitting  a  meal  to  be  charged. 
Under  the  American  plan  the  hotel  has  no  written  evidence  of 
the  meals  ordered,  unless  what  is  known  as  the  "American  plan 
check  system  "  is  used.  This  system  is  devised  to  do  away  with 
the  danger  of  serving  meals  to  those  not  entitled  to  them — a 
problem  with  which  the  hotel  run  on  the  American  plan  is  con- 
fronted. According  to  this  plan  each  guest  writes  out  his  order 
for  meals,  thereby  eliminating  many  mistakes  which  occur  when 
verbal  orders  are  used  and  securing  for  the  hotel  many  economies 
in  the  operation  of  the  dining  room.  This  check  on  the  kinds  of 
food  ordered  not  only  furnishes  the  hotel  with  accurate  data  of 
the  number  of  guests  served,  but  also  with  information  as  to  the 
most  popular  dishes,  thereby  enabling  the  management  to  keep  in 
close  touch  with  the  amount  of  supplies  used  and,  last  but  not 
least,  with  the  work  of  each  individual  waiter. 


490  ACCOUNTING— THEORY  AND  PRACTICE 

The  big  problem  in  hotel  catering  is  to  serve  the  guest  with 
the  best  of  food  and  still  keep  the  per  capita  cost  within  reason- 
able limits.  A  cost  system  in  the  kitchen  combined  with  com- 
parative analytical  reports  of  the  profit  on  sales  is  the  best 
solution  of  this  problem.  Any  number  of  economies  may  be 
effected  and  numerous  wastes  eliminated,  when  detailed  records 
of  current  consumption  are  kept  for  comparison  with  previous 
records. 

Hotel  Organization 

The  management  of  a  large  hotel  in  a  big  city  is  usually  in  the 
hands  of  a  general  manager  or  managing  director  with  as  many 
assistant  managers  as  the  size  of  the  organization  may  require. 
The  title  of  "managing  director"  is  commonly  used  in  the  hotel 
world  today  and  is  synonymous  with  that  of  the  president  of  an 
industrial  corporation. 

The  most  responsible  executives  under  the  managing  director 
are  the: 

Chief  accountant 

Steward 

Head  waiter  {maitre  d'  hotel) 

Chief  engineer 

Front  office  manager  (assistant  manager) 

Housekeeper 

These  department  heads  are  of  equal  authority  within  their 
own  sphere.  Other  department  heads  whose  duties  are  of  minor 
importance  are  the  persons  in  charge  of  the  hotel  valet,  telephone, 
and  laundry  services,  the  head  porter,  printing,  and  Turkish  or 
other  baths  departments,  etc. 

The  study  of  the  chart  of  the  hotel  personnel  (Form  i)  will 
make  clear  the  responsibilities  of  the  department  heads  and  the 
duties  carried  on  under  their  supervision.  Though  the  chief 
department  heads  are  answerable  to  the  general  manager,  it  is 
apparent  that  problems  of  management  connected  with  minor 


HOTEL  ACCOUNTING 


491 


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492  ACCOUNTING— THEORY  AND  PRACTICE 

activities  and  services  would  not  come  to  his  attention  but  would 
probably  be  assigned  to  the  care  of  an  assistant  manager. 

Records  and  Books  of  Account 

In  a  large  hotel  with  its  many  departments  and  with  the  many 
and  varied  services  which  it  renders  to  guests,  the  need  of  ade- 
quate records  for  administrative  purposes  is  apparent.  More- 
over, owing  to  the  constant  coming  and  going  of  guests,  the 
records  must  be  absolutely  accurate,  complete,  and  immediately 
available.  These  requirements  indicate  the  more  striking 
pecuHarities  of  hotel  accounting. 

It  is  not  the  purpose  of  this  article  to  present  a  detailed  sys- 
tem for  hotel  accounts  but  rather  to  point  out  the  basic  require- 
ments on  which  have  been  built  the  many  excellent  systems  in 
use  today.  The  endeavor  will  be,  first,  to  set  forth  the  more 
important  departmental  records,  their  function  and  operation, 
and  then  to  bring  these  together  into  the  general  books  of 
account  from  which  the  condensed  operating  statements  are 
made  up. 

The  outstanding  feature  of  the  system  of  records  is  that  it 
must  be  departmentized.  Only  so,  can  adequate  control  be 
secured.  The  chief  sources  of  income  to  the  hotel  are:  (i)  rooms, 
(2)  food,  and  (3)  beverages  and  cigars.  Minor  sources  are  ser- 
vices, such  as  afforded  by  telephone,  laundry,  baths,  barber, 
wash  and  bootblack,  candy,  news,  flower,  and  other  stands.  As 
previously  stated,  these  services  may  be  performed  by  hotel  em- 
ployees or  some  or  all  of  them  may  be  leased  to  concessionaires, 
thus  relieving  the  hotel  management  of  their  direct  supervision. 
In  some  places  an  automobile  garage  and  supplies  store,  stables, 
a  golf  course,  etc.,  may  be  operated  by  the  hotel.  In  others  the 
rent  of  stores  on  hotel  premises  is  an  additional  source  of  income. 
With  what  detail  these  various  activities  shall  be  handled  in  the 
accounts  depends  largely  on  their  relative  importance  from  the 
standpoint  of  administration.  Only  two  of  these  departments 
will  be  discussed  in  any  detail  in  this  article,  viz.,  rooms  and  food, 


HOTEL  ACCOUNTING  493 

the  fundamental  procedures  for  the  others  following  along  the 
same  general  lines. 

Accounting  for  Rooms 

In  accounting  for  the  rooms  used  by  guests,  the  following 
•jubsidiary  records  are  fundamental : 

Guest  Register 

Room  Count  Sheets  or  Book 

Arrival  Sheet 

Departure  Sheet 

A  brief  explanation  will  make  clear  their  use. 

The  first  record  of  a  room  sale  is  made  in  the  guest  register 
when  the  guest  arrives.  As  by  law  a  hotel  is  compelled  to  keep 
the  guest  register,  or  a  similar  permanent  record  of  all  arrivals 
and  departures  in  the  front  office,  other  records  must  be  made 
from  which  the  accounting  department  may  charge  the  guests' 
accounts  for  rooms  used.  One  of  these  records  is  the  room  count 
book  (Form  2)  on  which  the  occupied  rooms  are  listed  and  the 
total  income  from  rooms  for  each  day  is  ascertained.  This  sheet 
or  book  is  made  up  from  the  "room  rack,"  which  is  a  visible  card 
or  rack  slip  record  of  the  rooms  in  use,  showing  the  number  of 
the  room,  the  name  and  address  of  the  guest,  the  number  of  per- 
sons in  the  room,  the  date  of  arrival,  and  the  rate  (sales  price). 
These  cards  are  made  up  from  the  guest  register  and  are  removed 
from  the  rack  upon  a  guest's  departure. 

Accounting  for  all  rooms  used  and  proving  the  accuracy  and 
correctness  of  the  work  is  very  important.  In  this  connection,  at 
the  end  of  the  day  a  transcript  is  taken  from  the  hotel  register  of 
the  arrivals  during  the  day,  the  number  of  the  room  occupied  by 
the  guest  or  guests,  the  charge  for  the  room,  and  the  total  of  all 
room  charges  for  the  day  to  be  debited  to  the  new  guests'  ac- 
counts. This  constitutes  the  arrivals  sheet.  A  similar  tran- 
script of  departures  is  made,  usually  from  the  rack  shps,  on  the 
departure  sheet.     Inaccuracies  in  the  room  count  book  often 


494 


ACCOUNTING— THEORY  AND  PRACTICE 


occur  because  rack  slips  have  been  mislaid  or  lost.  The  method 
of  proof  of  this  record  varies  in  different  hotels.  By  one  method, 
to  the  total  of  the  preceding  day's  earnings,  as  shown  in  the  room 


ROOM  COUNT  BOOK 
Date 

Room  No. 

Amount 

Room  No. 

Amount 

Room  No. 

Amount 

Room  No. 

Amount 

101 

201 

301 

401 

102 

202 

302 

402 

103 

203 

303 

403 

104 

204 

304 

404 

105 

205 

305 

405 

rn 

U 1 



■ 

- 

■"" 

196 

296 

396 

496 

197 

297 

397 

497 

198 

298 

398 

498 

199 

299 

399 

499 

200 

300 

400 

500 

Form  2.     Room  Count  Book 


count  book,  is  added  the  total  on  the  arrivals  sheet  and  from  this 
total  is  deducted  the  total  shown  on  the  departures  sheet;  the 
resulting  figure  should  equal  the  total  of  the  day's  earnings  as 
shown  in  the  room  count  book.  In  this  way  the  accuracy  of  the 
entries  in  all  three  books  is  checked  and  the  management  has 
the  surety  that  all  occupied  rooms  have  been  charged  to  guests. 
The  correct  figure  for  income  from  rooms  having  been 
established,  it  is  carried  to  the  earnings  book,  one  of  the  most 
important  of  the  general  books,  which  will  be  explained  later. 


HOTEL  ACCOUNTING 


495 


Accounting  for  Income  from  Food 

The  main  subsidiary  records  used  in  accounting  for  restaurant 
income  are  the  following : 

Waiters'  checks 
Waiters'  checks  register 
Restaurant  cashier's  report  or  book 

The  waiter's  check  is  a  sales  slip  and  is  the  original  record  of 
income  from  sales  of  food.  To  control  and  keep  track  of  the 
charges  for  meals,  waiters'  checks  are  consecutively  numbered 
and  the  restaurant  cashier  enters  in  the  waiters'  check  register 
the  checks  given  to  each  waiter.  As  the  checks  are  paid  or 
signed,  the  waiter  turns  them  over  to  the  cashier  together  with 
the  money  received.  The  cashier  enters  them  on  a  sheet  ruled 
for  the  purpose  of  keeping  track  of  the  missing  checks.  The 
amounts  of  the  checks  may  be  either  printed  by  a  checking  de- 


RECEIPTS  FROM  DINING  ROOM 
Date 

Check  No. 

Total 

Restaurant 

Mineral  Water 

Cash 

Charges 

Cash 

Charges 

^ 



-       - 



Forms.     Restaurant  Cashier' s  Report 

vice  in  the  kitchen  or  inserted  by  waiters.  The  cashier  enters 
the  receipts  of  cash  and  the  amounts  of  the  signed  checks  to  be 
charged  to  guests  on  the  restaurant  cashier's  report  illustrated  in 
Form  3.  This  consists  of  a  sheet  containing  six  columns — one 
each  for  the  check  numbers  and  total  checks  and  two  each  for  the 
charge  and  cash  checks  of  the  restaurant  and  mineral  water 
trade.  This  report  is  sent  to  the  chief  accounting  office  daily, 
where  the  receipts  shown  thereon  are  entered  in  the  earnings 
book. 


496  ACCOUNTING— THEORY  AND  PRACTICE 

Guests'  Accounts 

The  guest  knows  a  hotel  usually  only  through  the  front  office. 
The  front  office  is  the  place  where  guests  register,  pay  their  bills, 
and  obtain  information — in  other  words  the  business  and  record- 
making  section  with  which  guests  come  in  contact.  The  actual 
accounting,  other  than  that  connected  with  payments  made  by 
guests,  is  done  in  the  accounting  department  of  which  the  front 
office  is  merely  a  branch. 

Except  in  the  case  of  the  local  guest  who  uses  only  the 
restaurant  or  other  facilities  exclusive  of  rooms,  or  the  patron  of 
any  of  the  hotel's  services  who  pays  on  the  spot  for  the  service 
received,  "  room  "  and  "  guest  "  are  practically  synonymous  for 
purposes  of  accounting,  the  problem  of  accounting  organization 
being  to  make  sure  that  all  charges  against  the  guest  are  gathered 
together  in  his  room  account. 

Handling  guests'  (customers')  accounts  in  hotel  accounting 
differs  somewhat  from  the  practice  in  other  lines.  Charges  for 
rooms  and  other  services  are  posted  to  the  front  office  ledger 
before  an  entry  is  made  in  an  original  entry  book,  such  as  a  sales 
journal.  It  is  apparent  that  a  guest  may  depart  at  any  moment 
and  therefore  his  bill  should  be  at  all  times  ready  for  settlement, 
leaving  the  determination  of  accuracy  in  the  majority  of  cases 
until  after  departure.  The  method  of  auditing  and  checking 
the  charges  to  obtain  proof  of  their  accuracy  will  be  described  in 
a  later  section. 

As  soon  as  a  guest  arrives  and  registers,  an  account  is  opened 
with  him  to  minimize  the  chances  of  a  charge  not  being  made. 
These  accounts  may  be  kept  in  a  loose-leaf  ledger,  or  better,  on 
cards  filed  in  a  horizontal  file,  either  alphabetically  by  guest  name 
or  consecutively  by  room  number.  The  card  system  is  preferable ; 
it  is  less  cumbersome  to  handle  and  more  convenient  in  making 
charges  to  the  accounts.  On  the  guest  card  (Form  4)  are  entered 
the  name  and  room  nimiber.  Below  are  spaces  for  making 
charges  for  rooms,  restaurant,  telephone,  laundry,  cigars,  porter, 
valet,  C.O.D.,  and  a  sundry  line  for  other  charges.     The  form, 


HOTEL  ACCOUNTING 


497 


of  course,  differs  depending  upon  the  departments  and  services 
maintained.  Below  the  various  charges  is  a  total  line  followed 
by  two  more  lines — one  for  allowances  and  rebates  and  the  other 
for  cash  paid  by  guests.  The  final  line  shows  the  balance  for- 
ward.    This  card  is  provided  with  seven  columns,  each  headed 


Guest's  Name  — 
Room  No. 

Ratp.  np.r  Dav 

No. 

Balance  Ford,  from  No. 
to     No. 



Date 

1 

2 

3 

4 

5 

6 

7         1 

Ford. 

Room 

Restaurant 

Telephone 

Laundry 

Cigars 

Porter 

Valet 

Sundry 

C.O.D. 

Total 

Rebates 

Cash 

Bal.  Ford. 

Nar"*                                                                                      Rnn 

rn  Nr», 

Form  4.     Guests  Ledger  Card 

by  a  date.  The  day's  charges  are  listed  in  the  proper  column 
and  line.  Daily  a  total  is  taken  and  the  balance  unpaid  is  for- 
warded to  the  next  day.  A  new  card  must  be  used  every  week. 
When  transferring  an  account  the  number  of  the  new  account  is 
entered  on  the  account  to  be  closed  out  and  the  number  of  the  old 
account  is  entered  on  the  new  account  in  a  space  for  the  purpose. 

VOL.  Ill — «a 


498  ACCOUNTING— THEORY  AND  PRACTICE 

This  is  to  facilitate  easy  reference  in  case  of  dispute.  All  old 
accounts  are  filed  in  a  rack  according  to  the  number  found  at  the 
upper  right-hand  corner  of  the  card. 

The  guest  accounts  are  controlled  by  an  account  in  the 
general  ledger  called  "Guests"  or  "Transients."  This  is  really 
nothing  more  than  the  usual  Accounts  Receivable  control.  To 
this  account  are  posted  the  totals  of  all  guests'  charges,  all  re- 
ceipts from  guests,  and  any  allowances  or  rebates  given.  In 
large  city  hotels  the  guest  accounts  are  often  divided  into  "guest " 
and  "city"  accounts,  when  charge  accounts  are  opened  for  the 
convenience  of  city  residents  who  use  the  hotel  dining  and  enter- 
tainment facilities.  When  this  division  of  the  accoimts  is  made 
the  cards  are  segregated  in  the  card  ledger  and  each  division  has 
its  own  controlling  account. 

Another  system  of  handling  guests'  accounts  is  shown  in 
Form  5.  Under  this  method  all  guests  staying  in  the  hotel  are 
listed  on  one  or  more  sheets,  a  new  sheet  is  made  out  for  each 
day,  and  balances  are  brought  forward  daily.  While  the  use  of 
these  sheets  is  to  be  preferred  to  keeping  the  accounts  in  a  bound 
ledger,  the  method  is  less  flexible  than  the  card  system  and  is 
found  in  operation  only  in  the  smaller  hotels. 

Sources  of  Charges  to  Guest  Accounts 

The  sources  of  the  two  main  charges  for  rooms  and  food  to 
guest  accounts  are  the  room  count  sheet  previously  described 
and  the  waiters'  checks  sent  to  the  billing  clerk  as  soon  as  en- 
tered by  the  restaurant  cashier.  The  charges  for  laundry,  baths, 
and  any  other  hotel  service  not  paid  for  in  cash  are  sent  to  the 
front  office  on  check  voucher  forms  as  soon  as  the  charge  is  in- 
curred so  that  the  item  may  be  promptly  entered  on  the  guest's 
account,  thus  insuring  the  completeness  of  the  account  when  the 
guest  asks  for  his  bill.  The  checks  give  the  room  number,  the 
number  of  the  floor,  and  the  amount  of  the  individual  charge. 
Cash  expenditures  for  the  account  of  the  guest  for  railroad  fare, 
theater  tickets,  and  other  items,  are  made  usually  by  the  front 


HOTEL  ACCOUNTING 


499 


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500  ACCOUNTING— THEORY  AND  PRACTICE 

office  cashier  and  a  cash  charge  slip  covering  same  is  passed 
immediately  to  the  billing  clerks. 

Hotel  Purchases 

As  the  provisions,  supplies,  and  other  hotel  purchases  directly 
or  indirectly  reach  the  guest  as  a  charge  for  meals  or  services,  it 
is  important  to  keep  proper  records  for  controlling  the  purchase 
expenditures.  All  orders,  therefore,  should  be  supported  by  a 
purchase  requisition  and  should  be  approved  by  someone  in 
authority.  In  every  hotel  there  should  be  a  receiving  depart- 
ment for  the  registration,  inspection,  and  count  of  all  purchases 
when  delivered  to  the  hotel,  after  which  they  should  be  sent 
to  the  proper  department  for  use  or  to  the  storeroom  to  be  held 
until  needed.  The  handling  of  food  purchases  will  be  discussed 
more  in  detail  under  food  control  accounting,  pages  508-516. 

Expense  purchases  are  handled  in  much  the  same  manner. 
All  outside  expenses  incurred  are  supported  by  an  order  drawn 
by  someone  in  authority,  authorizing  the  creditor  to  perform 
certain  services  or  deliver  certain  items,  chargeable  to  expense. 
This  same  order  requests  a  statement  for  such  charges  at  the 
time  the  order  is  given.  Expenditures  of  large  amounts,  say 
over  $100,  should  have  the  approval  of  the  manager.  Those  of 
smaller  amounts  the  department  heads  have  power  to  authorize. 

The  General  Books 

The  general  books  kept  by  a  hotel  in  addition  to  the  general 

ledger  consist  of  a: 

General  Journal 
Cash  Book 
Earnings  Book 
Voucher  Register 
Pay-Roil  Distribution  Book 

The  customary  subsidiary  ledgers,  viz.,  accounts  receivable 
(front  office),  accounts  receivable  (city  or  local),  and  accounts 


HOTEL  ACCOUNTING  501 

payable,  are  controlled  by  suitable  accounts  in  the  general  ledger. 
The  above  are  the  main  books  or  records  from  which  postings 
are  made  to  the  general  ledger.  Numerous  other  reports  and 
records,  the  more  important  of  which  have  already  been  ex- 
plained, work  into  the  above  books.  The  methods  of  collecting 
the  figures  for  entry  on  the  general  books  will  now  be  described. 

Verification  of  Earnings  and  Guests'  Accounts 

It  has  been  seen  that  the  daily  income  from  rooms  is  recorded 
in  and  shown  by  the  room  count  record,  the  verification  of  which 
has  already  been  explained.  The  income  from  the  restaurant  is 
reported  daily  on  the  restaurant  cashier's  report.  The  controller's 
work  of  verification  of  restaurant  sales  is  best  done  at  night  so 
that  all  auditing  work  is  finished  by  the  morning  of  the  next 
business  day.  All  of  the  other  income-producing  departments 
of  the  hotel  make  out  reports  of  their  day's  business,  separating 
the  cash  and  charge  sales,  and  send  these  to  the  accounting 
department.  In  some  cases  the  charge  sales  on  these  depart- 
mental reports  are  made  up  by  floors  (i.e.,  charges  are  separated 
on  the  basis  of  rooms  or  guests  on  each  floor).  This  secures  a 
localization  of  error  at  the  time  of  verification.  The  charge  sec- 
tions of  these  departmental  reports  must  prove  against  the  check 
vouchers  sent  to  the  bill  clerks  for  charge  to  the  guests'  accounts. 
The  cash  sections  must  agree  with  the  departmental  cash  receipts 
for  the  day. 

The  guests'  accounts  are  then  verified  in  order  to  make  sure 
that  all  income  shown  as  charged  by  the  departmental  reports 
has  actually  been  charged  to  guests.  The  necessity  for  this  daily 
verification  of  charges  to  guests'  accounts  in  the  hotel  business  is 
apparent.  All  of  this  verification  work  is  usually  done  at  night 
by  night  auditors,  to  whom  are  turned  over  the  departmental 
reports,  the  guests'  charge  slips  used  as  the  basis  of  entry  by  the 
bill  clerks,  and  the  guests  ledgers.  To  prove  the  charges  to  the 
guests'  accounts,  an  analysis  or  abstract  of  the  charges  for  the 
day  to  each  account  is  made  on  a  columnar  form  on  which  provi- 


502       ACCOUNTING— THEORY  AND  PRACTICE 

sion  is  made  for  the  room  number,  the  name  of  each  hotel  depart- 
ment from  which  charges  come,  a  total  column,  and  one  for 
rebates,  the  analysis  heads  being  the  same  as  shown  on  the  ledger 
card,  Form  4.  Each  line  thus  represents  one  room.  It  is  cus- 
tomary in  the  larger  hotels  to  make  this  abstract  by  jQoors  and 
recapitulate  the  floor  sheet  on  a  recapitulation  sheet.  If  the 
departmental  reports  have  been  made  by  floors,  any  error  is 
quickly  located.  If  the  income  charged  to  guests  as  shown  on 
the  abstract  of  guests'  accounts  agrees  with  the  income  reported 
by  the  room  count  book  and  the  various  departmental  reports, 
there  is  certainty  that  all  income  reported  has  been  charged  to 
guests. 

The  Earnings  Book 

The  earnings  book  is  the  journal  in  which  is  entered  for  posting 
to  the  general  ledger  income  accounts  the  summary  of  the  vari- 
ous items  of  income  after  verification  as  explained  above.  Form 
6  shows  one  form  of  ruling  for  this  book.  This  is  usually  a  loose- 
leaf  book,  one  page  being  given  to  each  month's  transactions, 
only  one  line  being  needed  for  each  day.  Thus  the  earnings 
book  segregates  all  classes  of  income  and  collects  the  total 
figures  to  be  posted  to  the  control  accounts  at  the  end  of  each 
month. 

The  "  Hotel  Sheet  "  System 

Another  system  of  ledger  account  keeping,  less  flexible  than 
the  one  already  described  but  requiring  fewer  records,  is  the 
method  used  in  the  houses  of  the  Ritz-Carlton  Hotel  Company. 
A  combination  ledger  and  journal  sheet,  variously  termed 
"daily  hotel  sheet"  or  "daily  bill  sheet"  (Form  7),  serves  two 
different  purposes.  First,  it  is  used  as  the  means  of  collecting 
and  showing  all  daily  sales.  Secondly,  it  functions  also  as  an 
accounts  receivable  ledger.  The  sheet  thus  replaces  the  guest 
cards  and  the  earnings  book  previously  described.  An  examina- 
tion of  the  sheet  shows  that  the  horizontal  lines  represent  the 


HOTEL  ACCOUNTING 


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504  ACCOUNTING— THEORY  AND  PRACTICE 

sales  accounts  while  the  columns  represent  the  guest  accounts, 
that  is,  accounts  receivable. 

The  operation  of  the  sheet  requires  only  brief  explanation. 
At  the  bottom  of  the  sheet  the  daily  total  is  obtained  by  omitting 
in  the  addition  any  amount  brought  forward  on  the  top  of  the 
sheet.  The  addition  to  this  total  of  the  amount  brought  forward 
gives  the  total  to  date,  i.e.,  total  debits  to  date  due  from  the 
various  guests. 

The  addition  of  the  horizontal  lines  gives  the  various  sales 
totals.  These  totals  must  prove  each  day  with  the  i>ales  records 
kept  in  the  different  departments.  If  there  is  a  mistake  some- 
where its  location  is  simple,  since  each  department  summarizes 
its  own  sales  total. 

The  credit  entries  to  the  sheet  are  located  at  the  bottom. 
After  all  credit  entries  have  been  made  the  difference  between 
the  sum  of  the  credit  entries  and  the  total  to  date  of  each  account 
is  carried  forward.  This  summarizes  and  closes  the  sheet  for  the 
day. 

In  starting  the  new  sheet  only  the  balances  left  in  each  guest 
account,  as  shown  on  the  bottom  of  the  old  sheet,  are  carried 
forward.  The  sales  accounts  are  posted  to  a  monthly  summary 
sheet  corresponding  with  the  earnings  book  and  from  there  find 
their  way  into  the  control  accounts  on  the  general  ledger. 

From  the  above  it  can  be  seen  that  the  sheet,  as  already 
stated,  acts  both  as  an  accounts  receivable  ledger  and  a  columnar 
sales  journal  and  is  the  medium  of  summarizing  daily  all  sales 
charges.  At  the  end  of  the  month  the  summary  sheet  shows  the 
total  debit  to  Accounts  Receivable  and  total  credits  to  the  vari- 
ous sales  accounts.  The  credits  to  guests'  accounts  as  shown  on 
the  daily  hotel  sheets  are  summarized  on  the  same  monthly 
summary  sheet.  The  credit  summary,  of  course,  must  corre- 
spond with  the  total  shown  in  the  cash  book,  allowance  book,  and 
ledger  transfer  book. 

Owing  to  the  fact  that  all  sales  charges  and  credits  have  to 
prove  daily  with  the  different  departmental  reports  of  sales  it 


HOTEL  ACCOUNTING  505 

will  be  seen  that  there  is  a  close  check  on  the  work  of  the  bill 
clerk.  If  it  is  once  established  that  all  sales  charges,  as  well  as 
credits  for  the  day,  are  correct,  the  balances  of  the  various  ac- 
counts receivable  must  be  correct  also,  unless  the  bill  clerk  has 
booked  charges  to  the  wrong  account.  The  "brought  forward" 
of  each  day  gives,  therefore,  a  correct  trial  balance  of  the  guest 
accounts  receivable. 

•Method  of  Handling  Cash 

The  problem  of  handling  and  controlling  cash  in  the  hotel 
does  not  differ  in  the  main  from  that  in  other  businesses  where 
there  are  numerous  centers  of  cash  receipts.  The  problem  is 
compHcated  somewhat  by  the  necessity  of  having  several  "shifts  " 
of  cashiers  in  some  of  the  departments.  This  is  particularly  true 
of  the  front  office  cash,  where  a  means  of  localizing  responsibility 
for  funds  must  be  used,  to  protect  both  the  incoming  and  outgoing 
cashier. 

Each  day  the  cash  turned  over  to  the  general  cashier  by  each 
of  the  departments  is  checked  against  the  cash  receipts  shown  in 
the  front  oflSce  cashier's  report,  the  cash  received  from  the 
restaurant  and  the  cash  derived  from  other  sources  of  income. 
In  the  office  of  the  general  cashier  is  a  cash  book  in  which  are 
entered  the  amounts  of  the  cash  received  from  the  front  office 
and  the  various  departments.  The  cashier  also  deposits  all 
cash  in  the  bank  daily  and  draws  checks  for  all  disbursements. 
As  the  details  of  the  receipts  are  shown  on  departmental  reports 
summarized  in  the  earnings  book  and  the  details  of  expenditures 
are  shown  on  the  voucher  register,  the  cash  book  is  freed  from  a 
great  deal  of  detail.  This  record  is  ruled  on  both  debit  and  credit 
sides  with  four  columns  headed  "Guest,"  "Local,"  "General," 
and  "Total."  Receipts  from  guests  are  entered  in  the  guest 
columns  on  the  debit  side  and  expenditures  on  account  of  guests 
on  the  credit  side.  Cash  items  affecting  local  or  city  accounts 
are  placed  in  a  column  of  their  own.  The  general  columns  are 
left  for  other  cash  transactions,  such  as  receipts  from  interest, 


5o6 


ACCOUNTING— THEORY  AND  PRACTICE 


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2   — 

=  1          1 

1 

MUM    M 

Arrivals 

1      1 

Departures 

1 

_ 

Carried  forward  Sleepers 

1 

1 

\ 

I 

Brought  forward 

95IJ 

_ 

.640 

_ 

450 

_ 

y 

Aprtment.,   a^i'.IJnS.-j!','' ■-■"" 

15 

- 

28 

- 

Serrants  Roum 

2 

— 

Bnakfiirt 

t 

— 

4 

— 

5 

— 

Luncheon 

9 

— 

Dinner 

14 

— 

Tm 

Supper 

OmktuI  Room 

Serrants  Board 

2 

50 

Sundries 

Cigars  and  Cigarette! 

Talis 

Do 

Telephone  (Trunll) 

Do        (Local) 

Laundrj 

Tailor  and  Pressing 

Sundries 

, 

Luncheon      ^•""'"t 

« 

— 

0 

— 

Dinner 

10 

— 

Supper 

Palm  Court 

Teas 

Dinners 

1 

Suppers 

Hairdresser 

Parcels  and  Bills 

Do 

Do 

Cash 

Postage 

Autos  and  Cabs 

— 

Xewspapen 

Theater  Tickets 

Messengers 

Expreseage 

Do           (Eioess  Weight) 

Railroad  Tickets 

16 

- 

Ilailj  Total 

42 

_ 

66 

50 

9G 

- 

1 

Total  to  Date 

9n 

_ 

,006 

50 

470 

- 

I 

l.csa   Cash  Paid               Cr. 

~ 

,ono 

_ 



..... 

470 

- 

1 

Allowances 

/ 

Accounts  Transferred  to  Ledft^r 

\ 

1 

1 

Carried  forward 

»W 

- 

006 

50 

Ledger  Folio 

Form  7.     Daily 


HOTEL  ACCOUNTING 


507 


\  1     i 

II       807 

808          1           809 

1.       B 

aa 

810 

Dab!                          199 

rz 

1      II       1 

1       1       1 

4 

1 

O'        —J 

! 

1 

3 

1 

1 

- 

1 

1 

1 

1          1 

TOTAL 

Brought  forward 

2.940 

22 

- 

25 

- 

Apartments,  '^fTf.^^'^''^ 

00 

— 

3 

_ 

Serrants  Room 

0 

— 

Ereakfast 

13 

— 

LuDcbeon 

9 

— 

10 

— 

Dinner 

30 

— 

Te. 

Supper 

1 

Breaktut  Roam 

2 

M) 

i^errante  Board 

5 

— 

Sundries 

Cigars  and  Cigarettes 

2 

— 

3 

— 

Tailj 

5 

— 

Do 

Telephone  (Trunls) 

Do        (Local) 

laundry 

Tailor  and  Pressing 

Sundries 

0 

_ 

Luncheon      "^^^^ 

23 

_ 

11 

- 

Dinner 

27 

- 

Supper 

Paim  Cuurt 

,UriU,l{ooin  and  Open  Au  UenUuruit 

Teas 

Dinners 

Suppers 

Hairdresser 

Parcels  and  Bills 

Do 

Do 

Cash 

Fostap 

Autos  and  Cabs 

& 

— 

Newspapers 

12 

— 

Theater  Ticliets 

12 

— 

Messengers 

Eipreseage 

Do          (Excess  Weight) 

lUUroad  Ticl;ets 

15 

- 

49 

50 

60 

- 

Dall;  Total 

239 

_ 

49 

50 

50 

_ 

Total  to  Date 

3,179 

- 

Less  Cash  Paid             Cr. 

1,470 

- 

Allowances 

Accounts  Transferred  to  Ledger 

49 

00 

50 

- 

Carried  forward 

1,700 

- 

Ledfer  folio 

Hotel  Sheet 


508  ACCOUNTING— THEORY  AND  PRACTICE 

dividends,  rentals,  etc.,  and  expenditures  on  account  of  the  pay- 
roll, accounts  payable,  etc.  The  total  column  is  used  only  to 
prove  its  mathematical  accuracy.  The  cash  book  is  footed 
monthly  when  the  totals  of  the  various  columns  are  posted  to 
their  respective  control  accounts. 

Recording  Expenditures 

In  the  general  books  expenditures  are  recorded  in  a  vouchers 
payable  register,  with  columns  for  the  proper  segregation  of 
detail.  Every  transaction  is  finally  reflected  as  a  debit  to  some 
stock  or  other  asset  account  or  an  expense  account  and  a  credit  to 
the  Vouchers  Payable  account.  In  the  stores  ledger  such  items 
are  posted  to  appropriate  stock  accounts,  which  form  a  perpetual 
inventory  but  do  not  enter  into  the  general  records.  This  matter 
will  be  taken  up  in  more  detail  when  the  cost  system  in  the  kitchen 
is  discussed,  where  also  the  distribution  of  the  pay-roll  will  be 
briefly  explained. 

Cost  System  Stores  Inventory 

Every  hotel  should  have  some  record  of  the  cost  of  operating 
the  kitchen  and  dining  room.  Unless  control  is  exercised  over 
this  branch  of  the  business,  waste  and  inefficiency  are  boimd  to 
be  present.  A  cost  system  for  the  kitchen  need  not  be  complex 
to  furnish  the  management  with  valuable  information. 

The  cost  system  begins  with  the  receipt  of  provisions  and  sup- 
plies. After  the  purchases  have  passed  through  the  receiving 
room,  where  record  is  made  of  their  receipt,  they  should  be 
classified  as  either  "direct"  or  "stores."  The  direct  purchases 
comprise  such  perishables  as  meats,  fish,  vegetables,  milk,  butter, 
oysters,  etc., — articles  which  are  delivered  direct  to  the  kitchen, 
pantries,  bake  shop,  or  pastry  shop  to  be  placed  in  refrigerators; 
the  "stores"  include  the  canned  goods,  groceries,  and  supplies 
taken  into  stores  and  are  issued  only  on  requisition.  These  latter 
purchases,  after  counting  and  checking,  are  delivered  with  a 
recei\ing  report  or  record  to  the  storesroom  where  the  proper 


HOTEL  ACCOUNTING  509 

records  of  their  receipt  are  made  out  on  suitable  stores  ledger 
cards.  A  receiving  record  shows  the  date  the  goods  are  received, 
the  concern  from  whom  received,  and  the  number  of  packages, 
boxes,  barrels,  or  other  units.  Since  it  is  usually  impracticable  to 
check  or  inspect  all  the  goods  upon  receipt,  this  record  should  be 
later  supplemented  by  a  report  of  material  received,  which  is 
prepared  when  goods  are  opened  up  and  inspected,  after  which 
it  is  sent  to  the  accoimting  office  where  it  is  checked  against  the 
creditor's  invoice. 

The  departments  to  which  perishables  are  delivered  are,  for 
purposes  of  food  control,  regarded  as  the  producing  departments. 
The  divisions  are  based  on  the  fact  that  the  items  on  the  menu 
can  be  classified  under  the  heads  of  "kitchen,"  "pantries," 
"pastry  shop,"  or  "bake  shop  ";  also  each  of  these  four  producing 
departments  has  its  own  chef  who  can  be  held  responsible  not 
only  for  the  quality  of  his  productions  but  also  for  the  economical 
operation  of  his  department. 

A  well-operated  hotel  kitchen  does  not  store  perishable  sup- 
plies in  greater  quantity  than  one  or  two  days'  consumption, 
provided  the  market  for  the  supplies  is  within  easy  reach.  Of 
staple  goods,  groceries,  canned  fruits,  and  vegetables,  etc.,  hotels 
make  larger  purchases  than  their  immediate  need,  as  at  times 
they  obtain  favorable  quotations  on  greater  quantities.  It  is 
obvious  that  if  the  hotel  is  ably  managed,  the  direct  purchases 
delivered  and  charged  to  the  producing  departments,  plus  the 
value  of  the  issues  from  the  stores,  would  constitute  the  cost  of 
sales  of  those  departments.  The  perishable  inventories  in  the 
producing  departments  should  be  kept  as  low  as  possible,  and 
the  direct  purchases  and  the  issues  from  the  stores  should  be 
based  on  the  anticipated  business  of  the  day.  When  once  it  is 
conceded  that  the  inventories  of  the  producing  departments  can 
be  kept  low,  there  already  exists  the  beginning  of  the  close  control 
of  kitchen  costs. 

The  advantages  and  operation  of  a  perpetual  inventory 
wherever  applicable  are  too  well  known  to  need  description. 


510  ACCOUNTING— THEORY  AND  PRACTICE 

Particularly  is  such  a  record  valuable  to  a  hotel,  where  large 
wastes  and  losses  occur  unless  there  is  a  rigid  check  on  con- 
sumption. A  physical  inventory  should  be  taken  at  least  once 
a  month  and  oftener  if  serious  discrepancies  are  found  when  the 
items  are  checked.  The  perpetual  inventory  will  greatly  simplify 
this  task  and  furnish  a  means  of  detecting  leaks  by  showing  in 
what  articles  discrepancies  appear.  Receipts  of  goods  are 
debited  in  the  usual  manner  to  the  inventory  records,  i.e.,  the 
stores  ledger  cards,  and  issues  are  credited  from  requisitions,  the 
difference  being  the  balance  on  hand.  This  balance  should  agree 
with  a  physical  inventory. 

Cost  is  the  basis  of  pricing  the  requisitions  and  also  the 
inventory.  Fluctuations  in  market  price  should  be  ignored,  for 
the  goods  cost  the  hotel  a  certain  figure  and  this  figure  is  the 
only  correct  one  to  use  in  figuring  cost.  If  the  hotel  buys  one 
lot  of  sugar  at  lo  cents  a  pound  and  later  another  at  8  cents, 
the  sugar  bought  at  lo  cents  is  first  consumed  and  charged  at 
that  price  and  then  the  8  cents  price  is  used. 

The  Food  Control  System 

It  should  be  clearly  understood  at  the  beginning  of  this  dis- 
cussion that  the  food  control  system,  so  far  as  concerns  the  con- 
sumption of  the  various  items  of  provisions,  does  not  enter  into 
the  general  books  of  the  hotel  at  all. 

The  system  of  control  consists  of  a  daily  analysis  of  restaurant 
costs  and  sales.  The  costs,  as  already  explained,  are  determined 
from  the  direct  purchases  and  the  issues  of  stores  charged  to  the 
producing  departments.  The  analysis  of  costs  and  sales  is  made 
upon  a  comparative  analysis  sheet  showing  the  items  of  the 
menu  classified  under  their  proper  departments.  Thus  the  cost 
of  the  soups,  fish,  meats,  poultry,  eggs,  vegetables,  etc.,  deHvered 
to  the  kitchen  department  are  compared  with  the  sales  of  these 
dishes  abstracted  from  the  waiters'  checks.  Similarly  the  costs 
of  the  pantries  department,  which  handles  oysters  and  clams, 
green  salads,  fruits,  cheese,  milk,  tea,  coffee,  etc.,  and  of  the  pastry 


HOTEL  ACCOUNTING 


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512       ACCOUNTING— THEORY  AND  PRACTICE 

department,  which  handles  ice  cream,  pies,  and  pastry,  are  com 
pared  with  the  sales  of  the  items  on  the  menu.  On  the  food  con- 
trol analysis  sheet  are  shown  the  per  cent  of  gross  profit  on  cost 
and  on  sales,  the  cost  of  each  dollar  sale,  the  total  costs  and  sales, 
and  the  total  gross  profit  of  the  department;  and  the  current 
figures  are  compared  with  the  average  figures  or  those  of  preced- 
ing months.  In  the  determination  of  gross  profit  only  the  cost 
of  provisions  and  supplies — not  labor — is  considered. 

The  comparisons  shown  on  such  an  analysis  sheet  are  invalu- 
able as  a  guide  to  the  economical  and  profitable  operation  of  the 
hotel  restaurant;  for  not  only  are  the  sources  of  the  greatest  profit 
indicated,  but  the  report  also  shows  the  steward  which  items  are 
the  most  popular.  At  the  end  of  the  month  the  daily  analysis 
sheets  are  summarized  and  a  report  is  drawn  up  showing  the 
cost  of  sales  and  the  profit  earned  by  each  department  for  the 
current  and  past  month,  as  illustrated  in  the  accompanying  sum- 
mary. Such  a  report  is  of  particular  interest  to  the  heads  of 
each  department,  as  any  waste  or  extravagance  in  the  use  of 
provisions  and  supplies  will  be  reflected  in  the  percentage  figures; 
on  the  other  hand  the  economical  use  of  ingredients  allied  with 
the  skill  to  concoct  dishes  in  delectable  ways  will  favorably  affect 
the  profit  figures  and  produce  a  better  showing. 

The  operation  of  a  high-class  restaurant  involves  so  heavy 
an  expenditure  in  rent,  light,  equipment,  salaries  of  chefs,  service, 
etc.,  that  every  dish  should  produce  a  gross  profit  sufficient  to 
cover  this  overhead  and  as  much  more  as  the  nature  of  the  dish 
and  efiicient  management  permit.  Since  the  era  of  prohibition, 
restaurant  managers  have  been  compelled  to  pay  more  attention 
to  economy  in  operation,  because  formerly  any  net  loss  on  the 
sale  of  food  was  often  recouped  by  the  large  profits  made  on  the 
sale  of  intoxicating  beverages. 

Compilation  of  Restaurant  Costs  on  the  General  Books 

The  general  books  of  account  show  the  restaurant  costs  and 
sales  as  a  whole  and  the  profit  thereon  and  no  attempt  is  made  to 


HOTEL  ACCOUNTING  5 1 3 

record  the  detail  shown  on  the  analysis  sheets.  The  segregation 
of  purchases  on  the  books  into  fish,  meats,  eggs,  etc.,  would  not 
give  any  accounting  information  of  value  unless  the  sales  of  the 
same  items  were  also  segregated.  To  burden  the  books  with 
such  details  would  require  more  clerical  work  than  the  results 
obtained  would  warrant.  Accordingly  the  bookkeeping  needs 
are  met  by  allotting  two  columns  in  the  voucher  register  to  provi- 
sions— one  for  direct  and  the  other  for  stores — and  by  opening 
two  corresponding  ledger  accounts.  Direct  Provisions  account 
is  charged  with  the  cost  of  all  perishables  and  credited  with  the 
deliveries  to  the  producing  departments;  Stores  Provisions  is 
charged  with  the  cost  of  the  food  items  that  can  be  stored  without 
refrigeration  and  is  credited  with  the  deliveries  to  the  producing 
departments,  thus  serving  as  a  controlling  account  showing  the 
value  of  the  provisions  on  hand  for  future  issue.  The  credits  to 
these  accounts  are  compiled  in  a  book  in  which  the  deliveries  and 
issues  to  the  departments  of  kitchen,  pantries,  etc.,  are  shown. 

The  total  credits  to  the  two  above  accounts  are  charged  to  an 
account  called  "Cost  of  Food  Sales,"  which  shows  on  its  credit 
side  the  income  received  from  sales,  the  balance  of  which  repre- 
sents the  gross  profit  on  food  sales.  This  balance  is  closed  out 
to  an  account  called  "Cost  of  Operating  Restaurant,"  which 
collects  on  its  debit  side  all  the  costs  of  operation,  such  as  wages, 
cleaning,  music,  light  and  heat,  laundry,  silver,  chinaware,  and  so 
on.    The  balance  of  this  account  is  transferred  to  Profit  and  Loss. 

Labor  and  Overhead  Costs 

The  other  two  costs  in  connection  with  operating  a  hotel  are 
labor  and  overhead.  The  distribution  of  labor  cost  is  effected 
on  the  pay-roll,  which  is  like  any  other  pay-roll.  Each  depart- 
ment keeps  the  time  of  its  employees,  and  the  time  of  each 
worker  is  distributed  to  the  department  in  which  employed. 
When  the  books  are  closed  and  results  by  departments  are  made 
up,  the  Pay-Roll  account  is  credited  for  the  total  amount  and 
the  various  departments  are  debited. 

VOL.  Ill — 3J 


5H       ACCOUNTING— THEORY  AND  PRACTICE 

Overhead  includes  the  usual  items  of  rent  or  occupation  cost, 
insurance,  taxes,  light,  heat,  power,  depreciation,  repairs,  sup- 
plies, and  any  other  indirect  expenses  incident  to  the  operation  of 
a  hotel.  Officers'  salaries,  insurance,  license  fees,  legal  expenses, 
accounting  expense,  and  other  charges  that  apply  to  the  system 
as  a  whole  and  cannot  be  charged  to  departments  are  properly 
included  under  General  and  Unapportioned  expenses  in  a  final 
section  of  the  profit  and  loss  statement. 

The  general  ledger  contains  an  account  with  each  of  these 
expenses  and  the  more  common  items  have  a  special  column  in 
the  voucher  register.  Charges  to  these  accounts  originate  and 
are  posted  in  the  usual  manner. 

All  overhead  expenses  should  first  be  distributed  to  depart- 
ments, regardless  of  whether  or  not  they  produce  any  income. 
Some  equitable  basis  must  be  used  and  this  basis  varies  with 
different  items  of  overhead.  Rent  can  best  be  distributed  on 
the  basis  of  floor  space  occupied,  taking  into  consideration  the 
desirability  of  the  location,  insurance  on  the  basis  of  the  value 
of  the  property  insured,  light  and  electric  power  on  readings  of 
meters  in  departments;  while  repairs,  supplies,  and  depreciation 
must  be  distributed  on  either  the  actual  or  an  estimated  cost  of 
such  charges  to  each  department.  After  all  overhead  has  been 
distributed  the  cost  of  the  unproductive  departments  can  be 
prorated  over  the  income-producing  departments. 

After  providing  for  all  accrued  expenses  and  deferred  charges, 
the  expense  accounts  are  closed  to  the  operating  departmental 
accounts  so  that  the  only  open  accounts  are  those  showing  the 
inventory  of  stores  on  hand,  accrued  and  prepaid  expenses,  and 
the  profit  or  loss  from  each  department. 

It  is  apparent  that  for  all  the  departments  except  the 
restaurant,  no  provisions  enter  into  their  cost. 

Board  of  Employees 

When  making  up  operating  results  by  departments,  a  very 
important  item  of  cost  which  should  always  be  considered  is  the 


HOTEL  ACCOUNTING  515 

cost  of  employees'  meals.  It  is  sometimes,  if  not  usually,  ar- 
ranged by  employees  of  the  hotel  that  they  are  to  receive  their 
meals  or  rooms  and  meals  in  lieu  of  wages.  In  this  case  such  cost 
is  really  a  part  of  the  salary  or  wages  paid  and  is  a  proper  charge 
against  the  operating  cost  of  the  department  in  which  such  per- 
sons work  and  a  credit  to  the  cost  of  food  charged  to  the  restau- 
rant. The  standard  form  of  contract  between  hotel  and  employee 
states  that  meals  of  a  certain  quality  and  nmnber  are  to  be  con- 
sidered as  part  of  the  employee's  wages.  What  is  the  cost  of 
employees'  meals  is  in  some  cases  determined  with  great  accuracy 
and  in  others  an  estimated  amount  is  used.  In  large  establish- 
ments, where  officers'  and  help's  food  can  be  definitely  segregated 
through  the  use  of  separate  kitchens  and  dining  rooms,  a  very 
close  determination  of  costs  is  possible.  The  total  cost  divided 
by  the  number  of  meals  served  gives  the  cost  per  meal.  An 
analysis  of  meals  served  on  the  basis  of  the  different  departments 
in  which  the  employees  are  engaged  gives  the  basis  for  prorating 
meal  costs  over  the  various  departments.  Where  the  officers 
use  the  regular  restaurant,  waiters'  checks  with  the  food  sales 
values  as  shown  by  the  menu  provide  the  basis  for  figuring  costs. 
The  method  used  is  somewhat  as  foUows  for  any  given  month. 
Assume  the  following  data : 

Restaurant  sales $55,269.25 

Officers'  meals  (sales  valuation) 3,241.30 

Cost  of  food 21,237.40 

The  segregation  of  costs  is  made  as  follows : 

Total  sales  ($55,269.25  +  $3,241.30) $S8,5io-55 

Ratio  of  officers' to  total  ($3,241.30 -f-  $58,510.55  = 

•0554) .0554 

Costofofficers'food($2i,237.4oX  .0554=$!, 176.55)     $  1,176.55 

When  showing  the  gross  profit  on  the  restaurant,  cost  of 
employees'  meals  should  first  be  deducted  from  the  cost  of  food 
used.  The  credit  here  becomes  a  charge  distributed  as  a  cost  of 
operating  the  various  departments  of  the  hotel. 


5l6  ACCOUNTING— THEORY  AND  PRACTICE 

By-Product  Sales  and  Difference  in  Stores 

Sales  of  unusable  or  surplus  by-products  from  the  kitchen, 
such  as  sales  of  grease,  should  be  treated  as  credits  to  Cost  of 
Foods,  inasmuch  as  their  original  cost  was  charged  to  food  costs. 

Similarly,  the  difference  in  stores  should  be  used  as  an  adjust- 
ment of  food  costs.  When  the  monthly  inventory  of  stores 
provisions  is  taken  and  the  amount  of  the  under-  or  over- valuation 
of  stores  requisitioned  is  thus  determined,  the  cost  of  foods  used 
must  be  adjusted  to  accord  with  the  figure  of  actual  costs  as 
shown  by  the  physical  inventory. 

Miscellaneous  Accounts 

Practically  the  only  accounts  found  in  a  hotel  other  than 
those  already  explained  are  income  from  concessionaires,  and  the 
general  and  unapportioned  expense  accoimts.  The  former  is 
nothing  more  than  rent  income  and  the  latter  are  the  usual 
expenses  found  under  this  caption  and  handled  in  the  same  way. 

Adjustment  and  Other  Entries 

The  adjustment  of  the  accounts  prior  to  closing  is  the  same 
as  in  all  businesses  and  comprises  the  accruing  and  deferring  of 
expenses,  the  taking  of  inventories — as  a  check  on  the  perpetual 
inventory — the  balancing  of  accounts  and  the  booking  of  depre- 
ciation. These  entries  present  no  special  problem  and  require 
little  comment.  In  the  hotel  business  the  provision  for  bad 
debts  perhaps  reaches  its  lowest  limits.  The  accounts  receivable 
do  not  run  into  large  figures  and  credit  is  extended  only  after  an 
examination  of  a  guest's  credit  rating.  Further,  to  assist  the 
hotel  in  the  collection  of  charges  the  law  gives  the  hotel  a  lien  on 
a  guest's  personal  property,  thus  making  losses  from  bad  debts 
small  indeed. 

As  regards  depreciation  the  reverse  holds  true.  Most  of  the 
equipment  of  a  hotel  is  in  constant  use  and  consequently  the  loss 
from  wear  and  tear  is  heavy.  On  silverware,  chinaware,  and 
linens  the  depreciation  charge  varies  from   15%  to  50%  per 


HOTEL  ACCOUNTING  51 7 

annum.  Tn  some  hotels  all  purchases  of  renewal  equipment  are 
considered  as  additions  to  the  fixed  assets  and  a  heavy  deprecia- 
tion is  charged  off  annually.  In  other  hotels  purchases  of  equip- 
ment are  considered  as  the  amount  by  which  such  items  depre- 
ciated during  the  period.  If  strictly  adhered  to,  the  two  pohcies 
would  have  the  same  net  effect,  but  it  must  be  admitted  that  if,  in 
the  latter  case,  purchases  of  renewals  are  inadequate  and  the 
equipment  is  allowed  to  run  down  the  profits  are  thereby  over- 
stated. Similarly,  if  renewals  are  so  generous  in  amount  as  to 
constitute  betterments,  an  understatement  of  profits  will  occur 
and  a  secret  reserve  will  be  built  up.  For  this  reason  the  former 
method  is  to  be  preferred. 

Method  of  Closing  the  Books 

The  method  of  closing  the  books  to  show  the  results  of  opera- 
tion is  only  slightly  different  from  the  usual  procedure.  After 
the  summarization  of  all  books  of  original  entry  and  posting  to  the 
general  ledger  and  after  the  ledger  has  been  adjusted  as  explained 
above,  the  process  of  clearing  the  various  departmental  accounts 
and  showing  the  net  profit  follow,  in  the  main,  those  of  other 
businesses  where  a  showing  of  departmental  results  is  attempted. 

In  a  manner  similar  to  the  way  previously  described  for  the 
restaurant,  the  costs  and  the  income  of  other  income-producing 
departments  are  summarized,  in  a  Cost  of  Rooming,  Cost  of 
Mineral  Waters,  Cost  of  Valet  Service,  Cost  of  Operating  Laun- 
dry, Cost  of  Cigar  Sales,  and  sundry  other  departmental  accounts. 
The  balances  of  these  accounts  are  closed  into  a  general  Profit 
and  Loss  account,  in  which  the  general  administrative  expenses 
appear  as  a  deduction  from  profits.  The  balance  of  the  general 
Profit  and  Loss  account  represents  the  net  profit  from  the  income- 
producing  departments  of  the  hotel.  If  rent  is  received  for 
concessions,  this  item  is  also  closed  into  Profit  and  Loss,  as  are 
income  from  investments,  interest  received,  and  cash  discounts 
obtained.  Interest  cost  and  allowances,  as  deductions  from 
profit,  are  also  closed  into  this  account.     The  balance  of  the 


5l8  ACCOUNTING— THEORY  AND  PRACTICE 

Profit  and  Loss  account  now  shows  the  final  net  profit  for  the 
period.  These  adjusting  and  closing  entries  are  made,  of  course, 
through  the  general  journal. 

Statements 

The  form  and  content  of  a  hotel  balance  sheet  do  not  contain 
distinctive  items  sufficient  to  require  illustration.  A  typical 
profit  and  loss  statement  and  schedules  are  appended  to  indicate 
how  operating  results  are  shown. 

In  reading  and  studying  the  statement  and  supporting  sched- 
ules, the  principles  discussed  in  the  preceding  pages  should  be 
kept  in  mind.  The  departmental  costs  subtracted  from  depart- 
mental income  give  the  gross  profit  by  departments.  This  use 
of  the  term  "gross  profit"  must  not  be  confused  with  its  use  in 
connection  with  detailed  restaurant  costs,  where  the  difference 
between  the  income  from  food  sales  items  and  the  direct  cost  of 
the  food  entering  into  those  items  is  called  "gross  profit." 

In  the  schedules  are  shown  the  distribution  of  the  depart- 
mental pay-rolls,  the  expenses  and  supplies  directly  chargeable 
to  the  various  departments,  the  board  of  the  employees  of  each 
department,  and  the  distribution  of  the  overhead  expenses.  In 
the  case  of  the  restaurant  (Schedule  2),  food  costs  comprise  an 
important  item.  Physical  inventories  are  used  here.  As  a 
memorandum  for  comparative  purposes,  following  "  Cost  of  Food 
Consumed"  are  shown  the  period's  requisitions  and  the  diflfer- 
ence  between  the  book  and  physical  inventories.  The  board  of 
all  hotel  employees— and  by-product  sales— is  deducted  from 
"  Cost  of  Food  Consumed  "  to  give  the  cost  of  food  used  in  meals 
served  guests.  Where  possible,  food  sales  and  costs  should  be 
summarized  as  shown  on  page  511  and  this  summary  be  made  a 
part  of  the  regular  reports  for  the  period. 

The  method  of  handling  a  non-income-producing  department 
is  shown  in  the  case  of  the  laundry  department  (Schedule  6),  where 
are  brought  together  all  the  costs  of  operating  it  and  these  are 
shown  distributed  to  the  proper  income-producing  departments. 


HOTEL  ACCOUNTING 


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520  ACCOUNTING— THEORY  AND  PRACTICE 

Schedule  i 
Cost  of  Operating  Rooms 

Pay-roll  (front  office,  service,  and  housekeeping) $  85,077.00 

Board  of  employees 32,200.00 

Fuel 8,500.00 

Light 9,500.00 

Laundry  (Schedule  6) 2,500.00 

Telephone  rental  and  operators 10,000.00 

Repairs  and  maintenance 450.00 

Depreciation  furniture  and  fixtures 2,780.00 

Water,  rent,  and  permits 4,500.00 

Supplies 3,600.00 

Stationery  and  gratuities  to  guests 2,500.00 

$161,607.00 

Schedule  2 
Cost  of  Operating  Restaurant 


Direct 
Provisions 

Stores 
Provisions 

Total 

Cost  of  Food: 

Inventory,  January  i ,  19 — 

Purchases 

$  1,750.00 

94,078.00 

1,410.00 

$  3,500.00 

36,667.00 

470.00 

$     5,250.00 

130,745-00 

1,880.00 

In  freight  and  express 

Less:  Inventory,  December  31, 19 — 

$97,238.00 
1,450.00 

$40,637.00 
2,900.00 

$137,875-00 
4,350.00 

Cost  of  Food  Consumed 

$95,788.00 

$37,737-00 

$133,525-00 

Requisitions 

$37,327-00 
410.00 

Stores  shortage 

$37,737-00 

Less: 

Sale  of  scraps  and  empties 

Board  of  employees  and  office 
force 

$  3,960.00 
47,025.00 

50,985.00 

Total  cost  of  food  consumed  in 
serving  meals  to  guests 

$  82,540.00 

HOTEL  ACCOUNTING 


521 


Schedule  2 — (Continued) 
Cost  of  Operating  Restaurant 


Pay-roll  (dining  room,  kitchen,  etc.) 

Salary  storekeeper 

Board  of  employees 

Light 

Heat 

Supplies 

Laundry  (Schedule  6) 

Breakage  of  china 

Depreciation  of: 

Linen 

Silverware 

Equipment 

Music 


Cost  of  operating  restaurant . 


Direct 
Provisions 


2,500.00 
1,000.00 
1 ,000.00 


Stores 
Provisions 


$24,938.00 
2,400.00 
10,525.00 
1,300.00 
7,500.00 
500.00 
1,500.00 
7,925.00 


4,500.00 
3,000.00 


Total 


64,088.00 


$146,628.00 


Schedule  3 
Cost  of  Operating  Mineral  Water  Department 

Cost  mineral  waters,  etc $  7,200.00 

Pay-roll 2,100.00 

Board  of  employees 600.00 

Light  and  heat 500.00 

Depreciation  of  equipment 1 20.00 

Breakages  and  repairs 2 10.00 


Total $10,730.00 

Schedule  4 
Cost  of  Operating  Cigar  Department 

Cost  of  cigars $  2,100.00 

Pay-roll 1,500.00 

Board  of  employees 300.00 

Light  and  heat 100.00 

Sundry  overhead 100.00 

Total $  4,100.00 


522  ACCOUNTING— THEORY  AND  PRACTICE 

Schedule  s 
Cost  of  Valet  Department 

Pay-roll $  1,250.00 

Board  of  employees 250.00 

Uniforms 47S-oo 

Supplies 250.00 

Total $  2,225.00 

Schedule  6 
Cost  of  Operating  Laundry 

Pay-roll $  i ,750.00 

Board  of  employees 350.00 

Water 385.00 

Light,  heat,  and  power 505.00 

Supplies  and  cleaners 300.00 

Depreciation  of  equipment 710.00 

Total $  4,000.00 

Distribution 

To  Cost  of  Operating  Rooms  (Schedule  i) $  2,500.00 

To  Cost  of  Operating  Restaurant  (Schedule  2) 1,500.00 

$  4,000.00 


CHAPTER  XV 
MUNICIPAL  ACCOUNTING 
By  James  L.  Dohr 

I.     The  Municipal  Corporation 

Definition 

Municipal  accounting  or,  as  it  is  sometimes  called,  "public" 
or  "governmental"  accounting,  is  that  branch  of  accounting 
which  has  to  do  with  the  accounts  of  states  and  public  corpora- 
tions, including  counties,  cities,  villages,  towns,  school  districts, 
road  districts,  levee  districts,  drainage  districts,  irrigation  dis- 
tricts, and  publicly  owned  charitable  and  penal  institutions.  Its 
general  principles  are  the  same  as  those  of  commercial  accounting 
but  owing  to  the  peculiar  nature  of  public  corporations,  their 
organization,  their  functions,  and  their  methods  of  finance,  cer- 
tain fundamental  differences  in  accounting  procedure  exist  which 
must  be  carefully  considered  in  order  to  appreciate  properly  the 
theory  and  practke  of  municipal  accounting. 

The  Nature  of  Public  Corporations 

The  nature  of  the  public  corporation  may  be  shown  best  by  the 
following  comparison  of  its  purposes,  organization,  functions,  and 
methods  of  finance  with  those  of  the  private  corporation. 
Public  Corporation  Private  Corporation 

1.  Created  and  powers  defined  by      i.  Created  and  powers  defined  by 

charter  from  the  state.  charter  from  the  state. 

2.  Owned  by  its  citizens.  2.  Owned  by  its  stockholders. 

3.  Governed   by  legislative   body      3.  Governed  by  board  of  directors 

elected  by  its  citizens  elected  by  its  stockholders. 

4.  Administering  officials,   elected      4.  Administering  officials,   elected 

or  appointed  by  governing  or  appointed  by  its  board  of 

body:  directors: 

523 


524 


ACCOUNTING— THEORY  AND  PRACTICE 


(a)  Mayor,  chief  executive 

(a)  President,  chief  executive 

officer. 

officer. 

(b)  Clerk. 

(b)  Secretary. 

(c)   Treasurer. 

(c)   Treasurer. 

(d)  Auditor  in  charge 

of 

ac- 

(d)  Auditor  in  charge  of  ac- 

counts. 

counts. 

Department  heads: 

5.  Department  heads: 

(a)  Police. 

(a)  Sales. 

(b)  Fire. 

(b)  Credits. 

(c)  Health. 

(c)  Production. 

(d)  Highways. 

(d)  Traffic. 

(e)   Charity. 

(e)   Purchases. 

(f)    Education. 

(g)  Inspection. 

Foremen  and  employees. 

6.  Foremen,    sales    agents,    em- 

Operations  consist  of  purchase 
and  storage  of  materials,  em- 
ployment of  labor  in  various 
capacities,  receipt  and 
disbursement  of  monies,  etc. 


ployees,  etc. 
7.  Operations  consist  of  purchase 
and  storage  of  materials,  em- 
ployment of  labor  in  manufac- 
turing and  in  rendering  serv- 
ices, sale  of  product,  receipt 
and  disbursement  of  monies, 
etc. 


Purpose  of  Organization 

The  purposes  for  which  public  corporations  exist  lie  back  of 
the  most  important  peculiarities  in  their  accounts.  Funda- 
mentally the  private  corporation  exists  for  the  purpose  of  profit; 
it  endeavors  to  sell  its  services  or  product  at  cost  plus  profit  so 
that  it  may  pay  dividends  to  its  stockholders,  who  have  volun- 
tarily contributed  capital  to  the  enterprise  in  anticipation  of  such 
dividends.  The  public  corporation  on  the  other  hand  exists  to 
render  certain  services  at  cost  to  the  beneficiaries,  who  are  in- 
voluntarily liable  for  such  cost  through  residence,  transaction  of 
business,  or  property  ownership.  While  this  difference  is  not 
always  present  (private  corporations  are  not  always  organized 
for  profit  and  the  public  corporation  may  operate  profit-making 
enterprises)  it  is  responsible  for  the  principal  peculiarity  of 
municipal  accounts.    Thus  the  Income  account  must  show: 


MUNICIPAL  ACCOUNTING  525 

For  the  Public  Corporation  For  the  Private  Corporation 

1.  Expenditures  made  in  rendering      i.  Amounts  realized  from  sale  of 

services.  product  or  services: 

2.  Revenues  raised  to  meet  same  as  to:  (a)  Cost  of  product  or  services. 

(a)  Adequacy.  (b)  Profits  or  losses  on  sale. 

(b)  Propriety.  (c)   Disposition  of  profits. 

(c)  Equity  of  apportionment 

between  beneficiaries. 

3.  Excess  of  revenues  or  expendi- 

tures. 

Thus,  while  the  Income  account  of  the  private  corporation  is 
concerned  with  profits  on  sales  and  their  disposition,  the  Income 
account  of  the  public  corporation  must  show  expenditures  and 
the  adequacy  of  the  revenues  raised  to  meet  them. 

Organization 

The  table  submitted  on  page  523  indicates  that  we  may  expect 
to  find  a  distinct  similarity  in  the  organization  structure  of  public 
and  private  corporations.  In  so  far  as  the  accounts  are  affected 
by  this  structure  we  may  expect  to  find  few  differences.  There 
is,  however,  one  peculiarity  in  the  organization  of  the  pubhc 
corporation  which  brings  up  important  accounting  problems,  i.e., 
the  decentralization  in  municipal  organization  due  to  political 
conditions.  The  public  corporations  of  this  country  are  con- 
trolled largely  by  the  political  parties  and  in  the  effort  to  remove 
certain  municipal  functions  from  the  ''realm  of  politics"  many 
independent  boards  and  commissions  have  been  created  to  control 
those  functions.  Thus,  in  a  small  city  we  may  find  the  following 
administrative  bodies : 

1.  Common  Council,  exercising  general  control  except  as 

noted  below.     Records  kept  by  city  auditor. 

2.  School  Board,  exercising  control  over  municipal  education 

except  as  noted  below.    Records  kept  by  board  secretary. 

3.  Board  of  Industrial  Education,  exercising  supervision  over 

industrial  education.   Records  kept  by  board  secretary. 


526  ACCOUNTING— THEORY  AND  PRACTICE 

4.  Library  Board,  exercising  partial  control  over  library- 

affairs.     Records  kept  by  librarian  as  secretary  of  the 
board. 

5.  Board  of  Public  Works,   exercising  control  over  con- 

struction of  streets,  sewers,  curbs,  water  mains,  and 
laterals.     Records  kept  by  city  auditor. 

6.  Board  of  Water  Commissioners,  exercising  control  over 

the  operation  of  the  municipal  water  department. 
Records  kept  by  board  secretary. 

It  will  be  noted  above  that  several  of  the  boards  mentioned 
have  each  a  secretary  who  keeps  the  records  covering  the  vari- 
ous activities  of  the  particular  department  administered  by  the 
board. 

This  decentralization  in  municipal  organization  is  of  interest 
to  the  accountant  since  it  involves  a  consolidation  of  balance 
sheets  and  income  accounts  in  order  to  present  complete  state- 
ments covering  the  finances  of  the  municipal  corporation  as 
a  whole.  As  between  themselves  the  various  departments 
which  keep  their  own  records  must  be  considered  as  distinct 
entities  with  interdepartmental  accounts  receivable  and  pay- 
able. 

This  condition  in  municipal  corporations,  together  with 
certain  other  causes,  has  led  to  a  movement  for  greater  efficiency 
in  municipal  administration  through  the  adoption  of  a  "city 
commission"  or  ''city  manager"  form  of  government,  under 
which  administration  and  control  are  centralized.  In  so  fat  as 
this  centralization  is  accompanied  by  a  centralization  of  the 
recording  functions  it  cannot  help  but  improve  the  character 
of  municipal  accounting. 

In  connection  with  the  subject  of  municipal  organization  it 
should  be  noted  that  the  division  of  jurisdiction  between  the 
public  corporations  may  overlap,  as  shown  by  the  following 
example  of  the  intercorporate  relationships  existing  in  a  typical 
state : 


MUNICIPAL  ACCOUNTING  527 


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528  ACCOUxNTING— THEORY  AND  PRACTICE 

Thus,  a  citizen  of  the  state  is  always,  depending  upon  his 
residence,  a  member  of: 

1.  The  state 

2.  A  county 

3.  A  town,  city,  or  village 

4.  A  school  district 

He  is  often  also  a  member  of  a  sewer,  road,  or  other  district. 

This  intercorporate  relationship  has  an  important  bearing  on 
uniform  municipal  accounting.  It  is  desirable  for  all  cities,  for 
example,  to  keep  their  accounts  on  a  uniform  basis  so  as  to  permit 
comparisons  and  a  consolidation  of  their  accounts,  so  as  to  show 
total  costs  of  government,  total  revenues,  total  assets,  etc.,  in  a 
given  state.  Such  a  consohdation  has  been  made  of  municipal 
revenues  and  expenditures  in  the  state  of  Wisconsin  where 
all  municipalities  submit  uniform  reports  to  the  State  Tax 
Commission.  Similar  work  is  done  in  Massachusetts  by  the  State 
Bureau  of  Statistics. 

A  further  point  of  interest  in  the  intercorporate  relationship 
lies  in  transactions  between  municipal  corporations.  Thus,  while 
all  may  have  certain  tax-levying  powers  the  assessment  and  col- 
lection of  the  tax  may  be  handled  by  one  corporation.  After 
collection,  appropriate  amounts  are  transferred  to  the  other 
corporations,  the  transfers  being  called  "agency  transactions." 

Purposes  and  Functions 

The  functions  of  the  public  corporation  give  rise  to  few  peculi- 
arities in  the  accounts  other  than  those  of  terminology.  In  many 
cases  the  municipality  performs  services  which  might  equally 
well  be  and  in  fact  often  are  rendered  by  private  corporations. 
Thus  in  one  city  the  water-works  may  be  privately  owned,  while 
in  another  it  may  be  operated  by  the  municipahty.  We  may  find 
in  some  cities  that  privately  operated  street  car  lines  compete 
with  those  municipally  owned.  In  general,  however,  we  may 
outline  the  functions  of  the  mimicipality  as  follows: 


MUxNICIPAL  ACCOUNTING  529 

1 .  Protection  of  the  person  and  property  of  its  members  by 

the  maintenance  of  police,  fire,  and  inspection 
departments. 

2.  Care  of  the  public  health  and  sanitation. 

3.  Care  of  its  members  who  are  unable  to  care  for  them- 

selves (charity). 

4.  Construction,  operation,  and  repair  of  streets,  surface 

drainage,  sewers,  curbs,  crosswalks,  etc. 

5.  Education  of  its  members. 

6.  Promotion  of  recreation  of  its  members. 

7.  Operation  of  public  service  enterprises,  such  as  water,  gas, 

or  electric  plants,  quarries,  street  railways,  cemeteries, 
etc. 

Municipal  Finance 

Municipalities  derive  their  funds  from  the  following  sources: 

I.  Taxation  or  a  levy  of  a  uniform  rate  upon  all  beneficiaries 
on  the  basis  of  property  ownership  or  income. 

7,  Miscellaneous  charges  at  a  nominal  fee  or  cost  for  licenses 
issued,  permits  granted,  or  services  rendered. 

3.  Special  assessment  or  levy  against  beneficiaries  for  serv- 

ices rendered  at  cost,  such  as  the  construction  of  roads, 
sewers,  etc.,  (for  outlays)  or  other  services  (for  ex- 
penses). 

4.  Utility  revenue  or  charges  at  cost  plus  profit  for  services 

rendered  by  municipally  owned  public  utilities. 

5.  Borrowing  on  serial  or  sinking  fund  bonds  or  short-term 

loans  (temporary  loans). 

6.  Income  from  trust  and  sinking  funds. 

The  plan  of  finance  used  by  the  municipality  is  known  as  the 
"budget"  system,  the  budget  being  defined  as  an  instrument  of 
financial  control.  For  the  most  part  the  budget  systems  in  use 
are  crude  and  inefficient,  consisting  mainly  in  a  few  lump  sum 
appropriations  (authorizations  to  incur  obligation)  made  by  the 


530  ACCOUNTING— THEORY  AND  PRACTICE 

budget  officials  on  the  basis  of  their  estimates  of  requirements 
Scientific  budget  procedure  involves  the  following: 

1 .  Preparation  by  department  heads  of  detailed  estimates  of 

requirements  for  their  departments  in  the  approaching 
fiscal  period. 

2.  Compilation  and  editing  of  such  estimates  by  the  auditing 

department. 

3.  Submission  of  the  revised  estimates  to  a  committee  on 

finance  by  the  auditing  department,  together  with 
comparative  data  on  prior  fiscal  periods  and  estimates 
of  revenues  available  and  required  to  meet  needs. 

4.  Hearings  by  the  committee  on  finance,  at  which  depart- 

ment heads,  auditing  department,  or  citizens  may  urge 
changes. 

5.  Revision  of  estimates  by  finance  committee  and  sub- 

mission to  governing  body  with  recommendation  of 
adoption. 

6.  Hearings  by  governing  body  similar  to  hearings  before 

committee  on  finance. 

7.  Revision  by  governing  body  and  adoption  of  budget  as 

official  plan  of  finance  by : 

(a)  Making  appropriations  covering  each  expenditure. 

(b)  Levying  necessary  taxes  and  authorizing  necessary 

loans. 

8.  Control  of  the  budget  by  appropriate  official  so  that  no 

expenditure  may  be  made  except  as  authorized  by 
appropriations. 

9.  Accounting  for  the  budget  by  keeping  record  of  each 

appropriation  and  obligation  named  thereunder,  and 
by  a  final  report  on  the  execution  of  the  budget. 

The  budget  is  made  up  of  the  following  estimates: 

1 .  An  estimate  of  financial  condition  at  the  beginning  of  the 

fiscal  period. 

2.  Estimated  revenues  during  the  fiscal  period. 


MUNICIPAL  ACCOUNTING  531 

3.  Appropriations  for  expenditures  during  the  period. 

4.  An  estimate  of  the  financial  condition  at  the  end  of  the 

fiscal  period.  . 

Legal  and  Economic  Restrictions 

The  financial  methods  of  municipalities  are  subject  to  certain 
legal  and  economic  restrictions,  the  non-observance  of  which  leads 
to  unsound  and  inequitable  practices.  The  restrictions  are  in  each 
case  determined  by  the  laws,  charter,  and  ordinances,  and  may  in 
general  be  stated  as  follows : 

1 .  No  expenditure  may  be  made  except  for  a  public  purpose 

and  must  be  within  the  powers  of  the  municipality. 

2.  No  expenditure  may  be  made  except  pursuant  to  an 

authorization  or  appropriation  by  the  governing 
body. 

3.  No  municipal  funds  may  be  expended  except  in  accord- 

ance with  the  purpose  for  which  the  funds  were  raised. 

4.  Total  revenues  from  taxes  in  a  given  period  may  not 

exceed  the  statutory  limitations  on  tax-levying. 

5.  Total  borrowing  may  not  exceed  the  statutory  limitation 

on  outstanding  indebtedness. 

The  economic  restrictions  may  be  stated  as  follows: 

1 .  Taxation  should  be  used  to  finance  all  expenditures  which 

in  general  benefit  all  citizens  equally,  including  the 
administration,  operation,  and  maintenance  of  munici- 
pal departments,  interest  and  principal  on  indebted- 
ness, and  minor  capital  expenditures  (outlay). 

2.  Special  assessments  should  be  used  to  finance  all  expendi- 

tures which  benefit  particular  individuals.  Thus, 
where  the  construction  of  a  pavement  enhances  the 
value  of  property  the  owner  should  pay  his  share 
through  a  special  assessment. 

3.  Short-term  loans  should  be  made  only  in  anticipation  of 

tax  collections. 


532  ACCOUNTING— THEORY  AND  PRACTICE 

4.  Long-term  loans  should  be  made  only  for  major  outlays 

and  the  life  of  the  bonds  should  be  commensurate  with 
the  life  of  the  property. 

5.  Expenditures  to  operate  and  maintain  public  utilities 

including  depreciation  and  taxes  should  be  paid  by  the 
consumer  through  rates  which  will  cover  cost  and  proftt 
to  the  municipality  on  its  investment.  Construction 
(outlay)  should  be  paid  by  borrowing  (major)  or  tax- 
ation (minor) . 

In  concluding  the  subject  of  municipal  finance  note  should  be 
made  of  the  nature  of  municipal  credit.  Where  private  corpora- 
tions offer  the  lender  earning  power,  assets,  and  personal  repu- 
tation as  security  for  his  loan,  the  municipal  borrower  offers  its 
tax-levying  power  and  assessed  valuation.  To  the  accountant 
this  difference  is  of  interest  in  that  it  diminishes  the  importance  of 
the  muncipal  balance  sheet  in  connection  with  municipal  loans. 

Dififerences  Between  Municipal  and  Private  Corporations 

In  summary,  the  peculiarities  of  municipal  corporations  may  be 
thus  stated  and  compared  with  those  of  private  corporations : 

Public  Corporations  Private  Corporations 

I.  Purpose  of  Organization 
To  promote  the  well-being  of  mem-      To  make  money  by  the  sale  of  its 
bars  by  rendering  services  at  cost.  product  at  cost  plus  profit. 

2.  Ownership 
Owned  by  its  citizens  who  involun-      Owned  by   its   stockholders   who 
tarily  contribute  capital,  exercise  voluntarily    contribute    capital, 

ultimate  control  in  management,  exercise  ultimate  control  in  man- 

receive  benefits  in  the  shape  of  agement,  receive  earnings  in  the 

services  at  cost.  shape  of  dividends,  and  share 

residual  assets  on  dissolution. 

3.  Organization 
Important  elements  of  decentraliza-      Tendency  toward  centralization  of 
tion.  authority  and  control. 


MUNICIPAL  ACCOUNTING 


533 


4.  Administration 
Administered  by  a  governing  body      Administered 
and  officials  with  closely  defined 
powers,  the  expenditure  of  funds 
being  limited  by  appropriations. 


by  directors  and 
officials  who  have  wide  powers  of 
discretion  and  are  seldom  limited 
in  the  expenditure  of  funds  by 
appropriations. 


Capital  Secured: 


5.  Methods  of  Securing  Capital 
Capital  Secured: 


(a)  From    its    beneficiaries    by 

taxation. 

(b)  From  individuals  by  special 

assessment  for  services  at 
cost. 

(c)  From  individuals  by  charge 

for  services  at  cost  plus 
profit. 

(d)  Borrowing  on  long-  or  short- 

term  loans. 


(a)  From    its    stockholders    by 

sale  of  capital  stock  or 
assessment. 

(b)  Borrowing  on  long-  or  short- 

time  loans. 

(c)  Retaining    earnings    in    the 

business. 


6.  Bases  of  Credit 


Credit  based  on: 


(a)  Its  tax-levying  power  as 

measured  by  limitations 
on  levies  and  assessed 
valuation. 

(b)  Occasionally  on  its  assets. 


Credit  based  on: 

(a)  Its  assets. 

(b)  Its  earning  power. 

(c)  Personal   reputation   of   its 

officers  and  stockholders 


II.     Classification  of  Accounts 

The  Problem  of  Municipal  Accounting 

The  problem  of  municipal  accounting  may  be  stated  as  in- 
volving the  establishment  of  such  a  system  of  reports,  records,  and 
forms  under  adequate  control  and  internal  check  as  will  permit 
the  determination  of  the  following  conditions : 

I.  Correct  Financial  Condition.  Assets  and  liabilities  must 
be  recorded  to  show  the  proprietary  interest  of  the  citizens;  they 
must  be  classified  to  show  the  relationship  of  current  assets  to 


534  ACCOUNTING— THEORY  AND  PRACTICE 

current  liabilities;  they  must  be  divided  to  show  the  status  of 
each  fund.  The  Proprietorship  account  must  be  so  analyzed 
as  to  show  the  budgetary  condition.  Indebtedness  must  be 
shown  in  its  relation  to  debt  limitation  and  assessed  valuation. 

2 .  Correct  Income  and  Outgo.  Revenues  and  expenditures  must 
be  classified  and  compared  to  show  adequacy  of  each  method  of 
financing  expenditure.  Comparisons  must  be  had  of  actual 
revenues  with  budget  estimates  and  actual  expenditures  with 
budget  appropriations.  Detailed  information  must  be  available 
in  connection  with  operating  costs  to  permit  comparisons  on  a 
unit  cost  basis. 

In  addition  to  the  above  there  exists  the  problem  of  imiform 
municipal  accounting.  In  order  to  benefit  by  the  comparisons 
and  statistics  made  available  thereby,  municipalities  should  keep 
their  accounts  on  as  nearly  a  uniform  basis  as  is  possible  and  to 
this  end  the  accountant  should  be  familiar  with  the  standard 
classifications  issued  by  the  United  States  Census  Bureau  and 
state  supervising  bodies.  While  each  municipality  has  its  own 
peculiar  problems  it  should  have  no  great  difficulty  in  adopting 
the  uniform  accounting  system. 

Classification  of  Accounts 

Municipal  accounts  are  classified  in  a  variety  of  ways  the  more 
important  of  which  may  be  called  "primary"  the  less  important 
"secondary"  classifications.  The  primary  classifications — usu- 
ally of  control  accounts — are  two  in  number.  Secondary  classi- 
fication usually  consists  of  detail  accounts  built  up  "under"  the 
control  accounts. 

The  primary  classifications  are: 

1 .  Classification  by  type  of  account. 

2.  Classification  by  fund. 

By  Type.  Classification  by  type  is  shown  in  the  following 
schedule,  in  which  a  comparison  is  made  with  the  corresponding 
classification  of  the  accounts  of  a  private  corporation : 


MUNICIPAL  ACCOUNTING 


535 


Public  Corporation 

I.  Assets: 

1.  Current 

2.  Deferred  Charges 

3.  Investments 

4.  Fixed 
II.  Liabilities:  II 

1.  Current 

2.  Deferred  Credits 

3.  Fixed 

III.  Proprietorship:  III 

1.  Proprietary  Reserves 

2.  Surplus 

3 .  Current  Income  and  Out- 

go 

IV.  Revenues  IV 
V.  Non-Revenue  Receipts  V.  Expenses 

VI.  Expenditures: 

1.  Expenditures  from  Reve- 

nue: 

(a)  Administration 

(b)  Operation 

(c)  Maintenance 

(d)  Interest    on    In- 

debtedness 

(e)  Principal    on    In- 

debtedness 

2.  Capital    Outlay    from 

Revenue 

3.  Capital    Outlay    from 

Non-Revenue  Receipts 


Private  Corporation 

I.  Assets: 

1.  Current 

2.  Deferred  Charges 

3.  Investments 

4.  Fixed 
Liabilities: 

1.  Current 

2.  Deferred  Credits 

3.  Fixed 
Proprietorship: 

1.  Proprietary  Reserves 

2.  Surplus 

3.  Undivided  Profits 

4.  Current  Profit  and  Loss 
Revenues 


In  the  above  comparison  it  will  be  noted  that  no  great  differ- 
ence exists  in  the  balance  sheet  accounts.  The  income  accounts, 
however,  are  fundamentally  different  owing  to  the  fact  that  the 
municipal  corporation  is  not  a  "profit  and  loss"  enterprise.  It 
becomes  necessary  then  to  adopt  a  distinct  terminology  such  as 
the  above,  in  which  the  nomenclature  may  be  explained  as 
follows: 


53^       ACCOUNTING— THEORY  AND  PRACTICE 

Revenue.  This  account  includes  all  income  accruing  from 
taxes,  licenses,  permits,  rates,  and  miscellaneous  charges. 

Non-Revenue.  This  account  includes  principally  income 
from  the  sale  of  bonds.  In  the  private  corporation  monies  so 
received  are  credited  directly  to  the  appropriate  balance  sheet 
accounts,  but  in  the  public  corporation  they  are  credited  to  an 
income  account  in  order  to  permit  a  comparison  with  the  expendi- 
tures made  therefrom.  At  the  close  of  the  fiscal  period  they  are 
closed  to  the  income  account  in  the  same  manner  as  a  revenue 
account.  After  closing,  a  transfer  is  made  to  the  appropriate 
balance  sheet  account. 

Expenditures.  This  account  includes  the  cost  of  all  services 
rendered  by  the  municipality  and  is  distinguished  from  expense 
in  that  it  includes  capital  items  or  outlay.  Here  we  find  a 
difference  similar  to  that  existing  in  the  non-revenue  receipts. 
Capital  outlay,  chargeable  in  the  case  of  the  private  corporation 
to  the  asset  account  direct,  is  charged  by  the  municipal  corpo- 
ration to  an  expenditure  account  and  is  closed  at  the  end  of  the 
fiscal  period  to  the  appropriate  income  account.  After  closing,  the 
total  amount  of  outlay  is  transferred  to  the  fixed  asset  accounts. 

Expenditures  are  divided  into  three  groups.  The  first  in- 
cludes expenses  (administration,  operation,  and  maintenance) 
and  interest  and  principal  on  indebtedness  (including  payments 
to  sinking  fund).  The  bulk  of  the  expenses  should  be  financed 
by  taxation  and  miscellaneous  charges.  The  second  includes 
outlay  financed  by  taxation  (minor  outlays)  or  special  assess- 
ment.    The  third  includes  outlay  financed  by  borrowing. 

The  basic  distinction,  then,  in  the  municipal  income  accounts 
lies  in  the  fact  that  all  items  affecting  the  budget,  whether  expense 
or  capital  outlay,  revenue  or  non-revenue,  must  be  included 
therein.  Depreciation  may  be  used  to  illustrate  this  difference. 
While  it  is  chargeable  as  a  cost  on  the  records  of  the  private 
corporation,  it  must  be  charged  direct  to  surplus  (or  a  non-budgel 
expenditure  account)  on  the  municipality's  ledger,  since  it  is  not 
provided  for  in  the  budget  and  is  required  only  as  a  valuation 


MUNICIPAL  ACCOUNTING  537 

account  and  an  element  in  cost  statements.  The  municipality 
borrows  to  construct  buildings,  for  instance,  and  includes  in  its 
budget  each  year  an  instalment  on  the  indebtedness  rather  than 
depreciation. 

Classification  by  Fund.  In  addition  to  the  above  classification 
by  type  it  is  essential  that  there  be  a  classification  by  fund.  The 
accounts  of  the  municipality  fall  naturally  into  groups  based  on 
the  financial  method,  each  group  having  its  own  asset,  liability, 
proprietorship,  revenue,  and  expenditure  items.  This  classi- 
fication must  be  maintained  along  with  the  first  primary  group- 
ing, i.e.,  all  accounts  like  Cash,  Accounts  Receivable,  Inventory, 
etc.,  must  be  divided  in  accordance  with  the  funds  listed  below: 

1 .  General  Fund.  This  group  includes  all  accounts  pertain- 
ing to  finance  by  taxation  and  miscellaneous  charges. 

2.  Special  Assessment  Fund.  This  group  includes  all  ac- 
counts pertaining  to  finance  by  special  assessment  (for  outlay). 

3.  Utility  Fund.  This  group  includes  all  accounts  pertaining 
to  finance  by  charges  at  cost-plus-profit  (municipal  public  utilities) . 

4.  Capital  Fund.  This  group  includes  all  accounts  pertain- 
ing to  finance  by  long-term  loans. 

5.  Sinking  Fund.  This  group  includes  all  accounts  of  the 
sinking  fund  for  retirement  of  non-serial  bonds. 

6.  Trust  Fund.  This  group  includes  all  accounts  pertaining 
to  the  trust  relationships  of  the  municipality. 

With  the  dual  primary  classification,  that  by  type  and  that 
by  fund,  the  accountant  can  prepare  not  only  a  consolidated 
balance  sheet  and  income  statements,  but  also  an  individual 
balance  sheet  and  income  statement  for  each  fund.  In  the  con- 
solidated statements  interfund  transactions,  such  as  loans  from 
one  fund  to  another,  are  eliminated. 

Secondary  Classifications 

The  secondary  classifications  depend  upon  the  information 
required  in  each  case.  Assets  and  liabilities  are  grouped  into 
cash,  taxes  receivable,  special  assessments  receivable,  etc.     (See 


538  ACCOUNTING— THEORY  AND  PRACTICE 

schedule  of  accounts  below.)  Liabilities  are  likewise  divisible 
into  audited  vouchers,  contracts  payable,  etc.  Proprietorship 
subclassification  is  discussed  later. 

Revenues  are  grouped  by  source. 

Expenditures  present  the  most  difficult  problem  of  sub- 
classification  because  of  the  necessity  for  several  bases  of 
classification,  as  follows: 

1.  Function.  The  accounts  must  show  the  cost  of  each  func- 
tion exercised,  such  as  education,  recreation,  charity,  etc. 

2.  Object.  In  several  connections  it  is  desirable  to  state 
expenditures  in  terms  of  salaries,  wages,  supplies,  telephone  and 
telegraph,  etc. 

3.  Character.  Operation  maintenance  and  fixed  charges 
should  be  shown  separately. 

In  order  to  illustrate  the  classification  of  municipal  accounts 
in  a  somewhat  more  detailed  manner  the  following  schedule  of 
accounts  covering  the  needs  of  a  small  city  is  presented; 

Assets 
Current 
Cash 
Taxes  Receivable 

Reserve  for  Uncollectible  Taxes* 
Other  General  Accounts  Receivable 

Reserve  for  UncoUectibles 
Special  Assessments  Receivable  (outlay)** 

Reserve  for  Uncollectible  Special  Assessments 
Utility  Receivables 

Reserve  for  Uncollectible  Utility  Receivables 
Prepaid 

Prepaid  Expenses 

Insurance 

Interest 

Rent 
Stores 


*  The  charge  creating  this  reserve  may  be  made  against  revenue  or  to  unclassified  e»- 

oenditure. 

**  Where  special  assessments  are  due  m  mstalments  over  a  period  of  years  only  the 
current  instalment  may  be  treated  as  a  current  asset,  the  remainder  being  included  under 

"fixed"  instalments. 


MUNICIPAL  ACCOUNTING  539 

Investments 
General 
Sinking  Fund 
Trust  Funds 
Fixed 
Land  and  Land  Improvements 

Reserve  for  Accrued  Depreciation 
Buildings  and  Other  Attached  Structure 

Reserve  for  Accrued  Depreciation 
Machinery  and  Equipment 

Reserve  for  Accrued  Depreciation 
Construction  in  Progress 

Assessable  Improvements 

Non-Assessable 
Interfund  (to  provide  for  amounts  due  one  fund  from  another) 
General 

Special  Assessment 
Utility 
Capital 
Sinking  Fund 

Liabilities 

Current 
Audited  Vouchers 
Contracts  Payable 

Temporary  Loans  in  Anticipation  of  Taxes 
Other  Current  Liabilities 
Prepaid 

Revenues  Received  in  Advance 
Fixed 
Bonded  Indebtedness 
General  Bonds 

Special  Assessment  Bondsf  (to  finance  construction  by  special 
assessments  whose  payment  is  deferred  for  a  period  of  years) 
Direct  Obligation 
Guaranteed^ 
Utility  Bonds 


t  These  bonds  are  usually  serial,  due  over  a  period  of  from  five  to  fifteen  years.  The 
current  instalment  is  included  under  current  assets  in  preparing  statements. 

J  Where  the  property  owner  is  given  a  number  of  years  in  which  to  pay  his  special 
assessments,  the  cost  is  meanwhile  financed  by  these  bonds  which  are  a  liability  of  the  tax- 
payer guaranteed  by  the  city.  Receipts  from  special  assessments  each  year  should  be  suffi- 
cient to  pay  maturing  bonds. 


540  ACCOUNTING— THEORY  AND  PRACTICE 

Interfund  (to  provide  for  amounts  due  one  fund  by  another) 
General 

Special  Assessment 
Utility 
Capital 
Sinking  Fund 

Proprietorship 

Surplus  (or  Deficit) 

General 

Special  Assessment 

Utility 

Capital 

Sinking  Fund 
Required 
Excess  over  Requirements 

Trust 
Income  and  Outgo  (current  year) 

General 

Special  Assessment 

Utility 

Capital 

Sinking  Fund 

Trust 

Revenues 

General 
Taxes  and  Tax  Penalties 
Licenses  and  Permits 
Fines  and  Forfeits 
Grants  and  Gifts 
Departmental  Earnings  (including  special  assessments,  so  called, 

for   miscellaneous  services,  such  as  street  cleaning,  sidewalk 

repair,  etc.,  as  distinguished  from  special  assessments  covering 

construction  or  outlay) 
Interest 
Miscellaneous 
Interfund 

Taxes  from  Other  Funds 


MUNICIPAL  ACCOUNTING  541 

Profit  on  Investments  in  Other  Funds  (utility) 
Other  Transfers 
Special  Assessment 
Special  Assessments  (for  outlay  only) 
Interest 

On  Deposits 

On  Deferred  Special  Assessments 
Interfund 

Special  Assessments  Paid  by  Other  Funds 
Interest  Paid  by  Other  Funds 
Utility  (following  Public  Service  Commission  requirements) 
Operating  Revenues 
Non-Operating  Revenues 
Interfund 

Revenues  from  Other  Funds  (general  fund  for  fire  protection, 
street  lighting,  etc.) 
Capital 

Interest  on  Deposits 
Sinking  Fund 
Interest 

Profit  on  Sale  of  Securities 
Interfund 

Interest  on  Loans  to  Other  Funds 

Annual  Instalment  on  Non-Serial  Bonds  from  General  Fund 
Trust 
Interest 

Profit  on  Sale  of  Securities 
Gifts  and  Other  Revenues 
Interfund 

Revenues  from  Other  Funds 


Non-Revenue  Receipts 

Indebtedness 
Temporary  Loans 
Bonds  Issued  (classified  by  project) 
Interfund 

Loans  from  One  Fund  to  Another 

Offsets  to  Outlay 

Agency — State  and  County  Taxes  Collected 


542  ACCOUNTING— THEORY  AND  PRACTICE 

Expenditures 

Operation,  Maintenance,  and  Indebtedness 
General 
Administration 

Protection  of  Person  and  Property 
Health  Conservation  and  Sanitation 
Charities  and  Corrections 
Highways  and  Bridges 
Education  and  Recreation 

Public  Service  Enterprises  (except  profit-making  utilities) 
Indebtedness 
Interest 
Principal 
Unclassified 
Interfund 

Payments  for  Services  to  Utility  Fund 
Instalments  on  Non-Serial  Bonds  to  Sinking  Fund 
Other 
Special  Assessment 

Interest  on  Special  Assessment  Bonds 
Utility 

Operating  expenses 

Depreciation 

Interfund 

Taxes  to  General  Fund 
Profit  to  General  Fund 
Sinking  Fund 

Administrative  Expenses 
Loss  on  Sale  of  Securities 
Indebtedness 
Principal  on  Non-Serial  Bonds  Retired 
Trust 

Administrative  Expense 
Loss  on  Sale  of  Securities 
Other  Expenses 
Outlay  from  Revenue 
General 
Classify  in  same  manner  as  expenditures  for  operation  and  main- 
tenance.   Outlay  for  utility  fund  charged  to  Outlay  from  Reve- 
nue-Public Service  Enterprises. 


MUNICIPAL  ACCOUNTING  543 

Special  Assessment 

Classify  in  same  manner  as  expenditure  for  operation  and  main- 
tenance. 
Non-Revenue  Expenditures 
Temporary  Loans 
Outlay  from  Bond  Issues 

Classify  by  project  and  in  accordance  with  accounts  under  opera- 
tion and  maintenance. 
Agency — State  and  County  Taxes 
Interfund 

Repayment  of  Interfund  Loans 


Budget  Accounts 

So  far  no  mention  has  been  made  of  the  classification  of 
fund  or  budget  accounts.  In  comparing  the  public  with  the 
private  corporation  one  of  the  principal  distinctions  to  be  noted  is 
in  the  control  of  expenditures  by  appropriations.  In  order  to 
record  the  status  of  these  appropriations  (and  other  budget 
accounts)  it  is  necessary  to  maintain  a  separate  set  of  accounts 
sometimes  known  as  "fund"  accounts  but  more  properly  desig- 
nated as  "budget"  accounts  to  avoid  confusion  with  the  term 
"  fund  "  as  applied  to  the  primary  classification  of  a  municipality's 
regular  accounts.  Although  kept  in  a  separate  ledger,  these 
accounts  are  in  effect  divisions  of  the  municipality's  proprietor- 
ship accounts.    They  may  be  classified  as  follows: 

1.  Budget  debits,  including  items  from  which  expenditures 

may  be  made. 

2.  Budget  credits,  including  all  commitments  made  against 

budget  debits. 

3.  Budget  surplus,  representing  funds  available  for  further 

appropriation. 

4.  Revenue  estimates,  including  estimates  of  revenues  to 

accrue  in  the  ensuing  period. 

5.  Appropriations,    including   all    authorizations    to   incur 

Uabilities. 


544  ACCOUNTING— THEORY  AND  PRACTICE 

This  primary  classification  of  budget  accounts  may  be  sub- 
classified  as  shown  in  the  following  schedule : 

1.  Budget  Debits 

(a)  Excess  of  Cash  over  Immediate  Demands  for  Cash. 

This  account  equals  in  amount  the  excess  of  cash 
over  audited  vouchers  and  other  liabilities 
presently  due  and  payable. 

(b)  Available    Balance.     This    account   includes    the 

accounts  receivable  and  other  items  which  will 
be  presently  liquidated  by  cash  receipt. 

(c)  Non-Available    Balance.     This    account    includes 

prepaid  items,  store  and  other  accounts  which 
will  not  be  liquidated  presently  by  cash  receipt. 

(d)  Bonds  Authorized  and  Unissued.    This  account 

includes  bonds  which  have  been  authorized  but 
not  sold. 

(e)  Estimated  Revenues  and  Non-Revenue  Receipts. 

This  budget  debit  covers  a  series  of  accounts 
classified  in  accordance  with  the  regular  revenue 
and  non-revenue  receipt  accounts,  and  shows 
the  estimated  amounts  which  will  accrue  in  the 
ensuing  period.  As  revenues  accrue  they  are 
credited  here  so  that  these  accounts  show  the 
unrealized  balance  of  budget  revenue  estimates. 

2.  Budget  Credits 

(a)  Appropriations.     These  budget  credits  consist  of  a 

series  of  accounts  classified  according  to  the  regu- 
lar expenditure  classification  and  cover  the  ap- 
propriations for  the  ensuing  period.  Actual  ex- 
penditures are  charged  to  the  accounts  so  that  the 
balance  represents  unexpended  appropriations. 

(b)  Reserve  for  Purchase  Orders.      When  purchase 

orders  are  issued  the  appropriation  accounts  are 
charged  and  this  account  credited.     When  the 


MUNICIPAL  ACCOUNTING  545 

voucher  is  audited  this  account  is  charged  and 
Excess  Cash  credited. 

(c)  Reserve  for  Contracts.    This  account  is  similar  to 

the  Reserve  for  Purchase  Orders,  except  that  it 
covers  contracts  awarded  rather  than  purchase 
orders  issued. 

(d)  Reserve  for  Temporary  Loans.    This  account  is 

credited  when  temporary  loans  are  made  and 

charged  when  they  are  repaid. 
3.  Budget  Surplus.     The  excess  of  budget  debits  over  credits 
shows  the  amount  available  for  further  appropriation. 
It  is  classified  as  follows : 

(a)  Reserve  for  Non-Available  Balance.     This  account 

keeps  out  of  free  budget  surplus  an  amount 
equivalent  to  unavailable  budget  debits. 

(b)  Reserve  for  Bonds  Authorized  and  Unissued.    This 

account  reserves  out  of  the  surplus  available  for 
appropriation  an  amount  equivalent  to  the  bonds 
authorized  and  unissued. 

(c)  Unappropriated  Surplus.    This  account  shows  the 

amount  available  for  further  appropriation. 

It  should  be  noted  in  passing  that  all  budget  accounts  must 
be  subclassified  as  to  funds  (General,  Special  Assessment,  Utility, 
Capital,  Sinking  Fund,  and  Trust)  so  that  separate  budget  state- 
ments may  be  prepared  for  each  fund. 

III.     Accounting  Records  and  Forms 

Type  of  Records 

The  records,  books,  and  forms  used  by  the  municipality  vary 
with  the  circumstances  of  each  case.  Thus,  in  one  municipality  it 
may  be  expedient  to  place  the  accounts  on  a  cash  receipt  and 
disbursement  basis  during  the  year  with  an  accrual  of  revenue 
and  expenditure  at  the  closing  date.  Wherever  it  is  possible  the 
accounting  system  should  be  on  the  accrual  basis. 

VOL.  Ill — 35 


546 


ACCOUNTING— THEORY  AND  PRACTICE 


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MUNICIPAL  ACCOUNTING 


549 


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550  ACCOUNTING— THEORY  AND  PRACTICE 

To  indicate  the  type  of  records  employed  in  municipal 
accounting  the  following  typical  examples  are  presented : 

Ledgers.  A  general  ledger  covering  all  municipal  accounts 
constitutes  the  basic  record  and  is  amplified  by  subsidiary  ledgers 
where  required  as  follows: 

1.  Tax  ledger  or  tax  roll,  in  which  the  tax  accounts  of  the 

various  individuals  appear.     (Form  i .) 

2.  Special   assessment   ledger,    containing   the   detail   of 

special  assessments  receivable. 

3.  Sundry  accounts  receivable  ledger. 

4.  Utility  receivable  or  customers  ledger.     (Form  2.) 

5.  Stock  or  stores  ledger  corresponding  to  stock  ledgers 

used  by  private  corporations. 

6.  Investment  ledger  containing  detail  of  investments. 


PageNo^                                                                                                                                         ' 

BONIl  ISRTIR  FOR  IMPROVEMENT  OP 

FROM                                                                             TO 

TOTAL  ISSUE  $..                     PAYABLE  AT  CITY  TREASURER'S  OFFICE     RATE  Of( 
ISSUE  AXrniORIZED 19                                                                               ) 

1 

DATE 

Bond  Paid  b; 
Check  No. 

Folio 

DEBIT 

CREDIT 
BALANCE 

CREDIT 

Folio 

D«te  of  Iseue 

Bond 

No. 

WHEN  DUJ 

Mo. 

D.r 

T..r 

1 

\ 

/ 

J 

_ 

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1 

\ 

Forms.     Bond  Register 

Reverse  of  form  bears  the  heading  "Bond  Register" 
of  nine  columns  like  the  last 


MUNICIPAL  ACCOUNTING 


551 


7.  Property  ledger  containing  detail  of  fixed  assets. 

8.  Creditors  ledger  containing  detail  of  audited  vouchers. 

9.  Contract  ledger  containing  detail  of  contracts  payable. 

10.  Bond  ledger  containing  detail  of  bonded  indebtedness. 

(Form  3.) 

11.  Revenue  ledger  containing  detail  of  revenue  control 

accounts. 

12.  Expenditure  ledger  containing   detail   of   expenditure 

contract  accounts. 

13.  Budget  ledger  containing  the  detail  budget  accounts. 

Books  of  Original  Entry.    These  books  are: 

I.  Cash 

(a)  Treasurer's  cash  book  in  which  are  recorded 
receipts,  disbursements,  bank  deposits,  and  bank 
withdrawals. 


, 

COUPON                  STREET  IMPROVEMENT 

INTEREST  65S  PAYABLE  ANNUALLY.  AtRlL  Ist. 

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and  a  space  for  page  numbers,  and  consists 
right-hand  column  of  this  form. 


552 


ACCOUNTING— THEORY  AND  PRACTICE 


1 

"«« PAY  ROLL  VOUCHERS        DISTRIBUTION  RECORD 

DATE 

IN  FAVOR  OF 

PARTICULARS 

Voucher 

Reference 

No. 

Audited 

ALLOWED 

Disallowed 

Acted  I'pol 

Amount 

PAID 

REMARKS 

Voucher! 
Credits 

Date 

Amouut 

Date 

Check 
7ia. 

Amount 

Brought   Forvard 

- 

1 

u 

J 

Form  4.     (a)    Voucher  Register  (face) 


rxTv  nv 

WATKR  DFPARTWKNT 

Face 

' 

GENERAL  LEDGER 

OPERATING  EXPENSES 

Account 

Folio 

/ 

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Debits 
Amount 

Steam 
Gener- 
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Power   1  Power 
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General 

Undis- 
tributed 

and 
Plant 

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Form  4.     [b)    Voucher  Register  (reverse) 


MUNICIPAL  ACCOUNTING  553 

(b)  Auditor's  cash  book  in  which  are  recorded  treas- 
urer's reports  of  receipts  and  disbursements.  If 
the  accounts  are  kept  on  a  cash  basis,  this  book  is 
replaced  by  a  cash  receipt  journal  and  a  cash 
disbursement  journal. 

2.  Revenue 

Revenues  are  accrued  from  various  sources,  such  as 
the  tax  roll,  utility  roll,  etc.,  while  a  revenue  journal  is 
used  to  accrue  various  miscellaneous  items.  ' 

3.  Expenditures  i 

(a)  Voucher  register  (Form  4,  Pay-Roll,  Water  Depart-I 

ment)  i 

(b)  Register  of  purchase  orders  issued.  1 

4.  Stores  ' 

The  usual  type  of  material  received  and  issued  record 
is  used. 

5.  General  Journal 


No.  B 

PAY-IN  VOUCHER 

Date 192. . . 

Mr 

Pay  to  the  City  Treasurer  $ 

For 

Description 

Lot Block Add 

City  Clerk 

Payment  must  be  made  to  City  Treasurer 
Original  as  Receipt  to  Payor 


Form  5.     (a)  Pay -In  Voucher  {original) 


554  ACCOUNTING— THEORY  AND  PRACTICE 

No.  B 

PAY-IN  VOUCHER  STUB 

Date 192. . . 

To  the  Treasurer:  Collect  from 

Mr 

Amount  $ 

For 

Description 

Lot Block Add 

City  Clerk 

Treasurer  will  detach  and  retain  this  Stub. 

Form  5.     (b)  Pay-In  Voucher  (duplicate) 

No.  B 

PAY-IN  VOUCHER  STUB 

Date 193. . . 

To  the  Comptroller 

The  Treasurer  will  collect  from 

Mr 

This  Stub  accoimted  for  on  Treasurer's  Report  No 

Amount  $ 

For 

Description 

Lot Block Add 

Issuing  Office  will  detach  and  retain  this  Stub. 

Form  5.     (c)  Pay-In  Voucher  (triplicate) 


MUNICIPAL  ACCOUNTING 


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556  ACCOUNTING— THEORY  AND  PRACTICE 

Forms.     The  following  fonns  are  used : 

1.  Cash.  The  treasurer  reports  cash  receipts  on  a  daily 
summary  of  cash  receipts.  Each  individual  receipt  is  substanti- 
ated by  a  duplicate  of  the  receipt  issued  to  the  payee  which  is  one 
of  the  following  forms : 

(a)  Treasurer's  triplicate  receipt  issued  in  triplicate,  one 

copy  going  to  payee,  one  to  the  municipal  auditor,  and 
one  remaining  in  the  treasurer's  possession. 

(b)  Pay-in  vouchers  (Form  5)  issued  by  departments  di- 

recting the  treasurer  to  collect  certain  amounts.     Dis- 
tribution of  copies  as  under  (a). 

(c)  Cut  receipts  similar  to  those  used  by  railway  train 

conductors. 

(d)  Tax  receipts.  Distribution  as  under  (a)  above.  (Form  6, 

which  applies  to  real  estate  taxes.    A  similar  form  is 
used  for  income  and  personal  property  taxes.) 

(e)  Utihty  receipts.     Distribution  as  under  (a)  above. 

Disbursements  in  municipalities  are  often  made  by  an  order 
upon  the  treasurer  issued  by  the  auditor  and  paid  by  the  treasurer 
through  the  issuance  of  a  treasurer's  check.  This  practice  causes 
many  inconveniences  because  of  the  fact  that  orders  issued  are 
not  immediately  presented  to  the  treasurer  for  payment,  thus 
causing  "  outstanding  order  "  accounts.  This  may  be  eliminated 
by  the  use  of  an  order  check  (Form  7) ,  which  is  in  effect  an  order 
combined  with  a  check  and  is  signed  by  the  treasurer  before 
issuance. 

2.  Expenditures  are  covered  by  the  following  forms: 

(a)  Requisition  for  materials  or  services 

(b)  Purchase  order  (Form  8) 

(c)  Received  report 

(d)  Voucher  jacket  (Form  9) 

(e)  Time  cards 

(f)  Pay-rolls 

(g)  Emergency  orders 


MUNICIPAL  ACCOUNTING 


557 


558 


ACCOUNTING— THEORY  AND  PRACTICE 


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MUNICIPAL  ACCOUNTING 


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ACCOUNTING— THEORY  AND  PRACTICE 


CITY  OF- 


INVOICE 


-STREET  NO— 


-SHIPPED  VIA- 


STATE  OF — 
COUNTY  OF- 


jss. 


The  UndcraigTied  being  duly  ewom,  upon  hia  oath  aays  that  t)ie  attached  cr  foregoing  claim^ 


ITO  BE  WRITTEN  IN) 

Subscribed  and  ewom  to  be/or 
day  of 


w  jiust,  correct  and  true  and  that  no  part  thereof  haa  been  audited,  tUlowed  or  paid. 


_A.D.,  19_ 


Form  Q.     (a)  Invoice  (face) 


In  addition  to  the  above,  various  types  of  forms  are  required, 
such  as  journal  vouchers,  job  orders,  court  dockets,  council 
proceedings,  etc. 

Statements 

The  value  of  a  municipal  accounting  system  can  be  no  greater 
than  the  worth  of  the  information  presented  in  statements  and 
reports  prepared  therefrom,  so  that  the  accountant  must  exercise 
great  care  in  preparing  clear  and  concise  exhibits  and  schedules. 
This  is  particularly  true  in  the  case  of  municipal  accounts  because 
municipal  officials  and  taxpayers  as  a  class  are  not  familiar  with 
accounting  procedure  and  technique. 

To  illustrate  the  manner  in  which  statements  and  reports 
should  be  drawn  up  and  presented  the  following  exhibits  are 
submitted.  Together  with  these  statements  and  reports,  the 
various  types  of  journal  entries  are  shown  for  the  purpose  of 
illustrating  the  methods  by  means  of  which  the  accounts  pecuHar 
to  the  municipal  corporation  are  handled. 


MUNICIPAL  ACCOUNTING 


561 


Voucher  No^ 


CITY  OF 

To 

Amount  Claimed  i 

Amount  Allowed,  $ 

Paid  by  Certificate  of  ADDrooriation  No. 

Description 

Detail 

Department 
Total 

Price  O.K. 

Extensions  O.K. 

Order  No. 

laim, 

I  certify  ui  appropriation  is  available  to  meet  this  c 
and  recommend  its  allowance. 

A 
0 

FUed 

19 

Recommended  by 
allowance. 

Committee 

on 

Claims  for 
19 

Allowed 

by  Council. 

19 

Cit]f  Auditor 


Form  g.     (b)  Invoice  (reverse) 


Statements  of  Financial  Condition — General  Fund 

Statements  of  financial  condition  must  be  prepared  to  show 
the  financial  condition  of  each  fund  as  well  as  the  consolidated 
financial  condition  of  all  funds.  Along  with  each  balance  sheet 
there  will  be  presented  an  analysis  of  the  budget  position  showing 
the  amount  of  funds  available  for  further  appropriation.  The 
budget  surplus  in  each  case  should  be  reconciled  with  the  surplus 

VOL.  Ill — 36 


562  ACCOUNTING— THEORY  AND  PRACTICE 

shown  by  the  balance  sheet.     The  balance  sheet  of  the  general 
fund  follows: 

Statements  of  Financial  Condition 

Exhibit  A 

General  Fund 

Assets 

Cash  on  Hand  and  in  Banks $500,000  00 

Taxes  Receivable $150,000.00 

Less:  Reserve  for  Uncollectible  Items 40,000.00       1 10,000.00 

Other  General  Accounts  Receivable $  50,000.00 

Less:  Reserve  for  Uncollectible  Items —         10,000.00        40,000.00 

Investments 75,000.00 

Prepaid  Expenses 5,000.00 

Stores 30,000.00 

Due  from  Other  Funds 25,000.00 

Total  Assets $785,000.00 

Liabilities 

Audited  Vouchers $300,000.00 

Contracts  Payable 1 50,000.00 

Temporary  Loans 1 20,000.00 

Revenues  Paid-in  in  Advance 4,000.00 

Due  Other  Funds 10,000.00 

Total  Liabilities $584,000.00 

Proprietorship 
Excess  of  Assets  over  Liabilities $201,000.00 

Budget  Position 

Excess  of  Cash  over  Immediate  Demand  for  Cash $  40,000.00 

Available  Balance  (Accounts  Receivable) 250,000.00 

Non-Available  Balance  (investments  and  deferred  charges 

in  excess  of  deferred  credits) 31,000.00 

Estimated  General  Revenues — ^Unrealized  Balances 70,000.00 

Total $391 ,000.00 


MUNICIPAL  ACCOUNTING  563 

Reserve  for  Purchase  Orders f  20,000.00 

Reserve  for  Contracts 30,000.00 

Reserve  for  Temporary  Loans 1 20,000.00 

Unexpended  Balances  of  Appropriations 90,000.00 

Total $260,000.00 


Budget  Surplus* $131,000.00 

Reserve  for  Non-Available  Balance $31,000.00 

Unappropriated  Surplusf 100,000.00     $131,000.00 


The  following  journal  entries  indicate  the  manner  in  which  the 
peculiar  accounts  of  the  general  fund  are  handled: 

I .  Regular  Accounts 

(a)  To  enter  tax  roll: 
Debit: 

Taxes  Receivable 
Credit : 
Agency  Receipts — State  and  County  Taxes 
Special  Assessments  Receivable  (portion  in- 
cluded in  tax  roll) 
Utility  Receivables  (delinquents  included  in 

tax  roll) 
Revenue  from  Taxes 
Revenue  from  Special  Assessmentsf 

*  Reconciled  to  balance  sheet  surplus  as  follows: 

Balance  Sheet  Surplus $201,000.00 

Add:  Revenues  Unrealized 70.000.00     J271. 000.00 

Deduct: 

Purchase  orders  issued  for   which  no 

audited  voucher  appears I20, 000.00 

Contracts  awarded  but  no  liability  in- 
curred   .  30,000.00 

Unexpended  balances  of  appropriations 

already  made 90,000.00 

Total 140,000.00 

Budget  Surplus  as  above $131,000.00 

t  While  the  budget  surplus  appears  as  $131,000,  it  must  be  noted  that  in  order  to 
;how  the  amount  immediately  available  for  further  appropriation  a  reserve  for  non-availa- 
ble balances  must  be  set  up. 

X  When  any  charges,  such  as  special  assessments,  are  placed  on  the  tax  roll,  they  assume 
the  status  of  taxes  receivable  and  are  included  under  that  bead  from  then  on. 


564  ACCOUNTING— THEORY  AND  PRACTICE 

2.  Budget  Accounts 

(a)  To  open  accounts  at  the  beginning  of  the  fiscal 
period : 
Debit: 

Excess  of  Cash  over  Immediate  Demands  for 

Cash 
Available  Balance 
Non- Available  Balance 
Credit : 
Reserve  for  Non- Available  Balance 
Unappropriated  Surplus 

(b)  To  enter  budget  as   adopted  by  the  governing 

body : 
Debit: 

Estimated  Revenues  from  Taxes  and  Mis- 
cellaneous Charges 
Credit : 

Appropriations 

(c)  To  enter  accounts  receivable  when  charge  to  va- 

rious receivable  accounts  is  made  in  regular  ac- 
counts: 
Debit: 

Available  Balance 
Credit: 

Estimated  Revenues  from  Taxes  and  Mis- 
cellaneous Charges. 

(d)  To  enter  cash  collections: 

Debit: 

Excess  of  Cash  over  Immediate  Demand  for 
Cash 
Credit: 
Available  Balance 
or 

Estimated  Revenues  from  Taxes   and  Mis- 
cellaneous Charges 


MUNICIPAL  ACCOUNTING  565 

(e)  To   enter  purchase   orders   issued   and  contracts 

awarded: 
Debit: 

Appropriations  or 

Non- Available  Balance* 
Credit: 

Reserve  for  Purchase  Orders 

Reserve  for  Contracts 

(f)  To  enter  amount  of  non-available  assets  becoming 

available : 
Debit: 

Appropriations 
Credit: 

Non- Available  Balance 

(g)  To  enter  vouchers  audited  for  payment : 

Debit: 

Reserve  for  Purchase  Orders 
Reserve  for  Contracts 
Credit: 

Excess  of  Cash  over  Immediate  Demands 
(h)  To  enter  temporary  loans  made : 
Debit: 

Excess  of  Cash  over  Immediate  Demands  for 
Cash 
Credit: 

Reserve  for  Temporary  Loans 
(i)  To  close  budget  accounts : 
Debit: 

Appropriations  (Unexpended  Balances  Laps- 
ing) 
Credit: 

Estimated  Revenues  (Unrealized  Balances) 
Unappropriated  Surplus 


*  With  each  charge  or  credit  to  Non-Available  Balance  a  corresponding  entry  must  be 
made  to  the  Reserve  for  Non- Available  Balance  account. 


566  ACCOUNTING— THEORY  AND  PRACTICE 

Special  Assessment  Fund 

The  financial  condition  of  the  special  assessment  fimd  is 
presented  in  a  similar  manner.  Though  various  methods  of 
finance  are  in  vogue,  a  typical  procedure  would  be  as  follows : 

A  street  improvement  is  contemplated  at  an  estimated  cost  of 
$15,000,  of  which  $12,000  is  to  be  charged  to  property-owners  in 
the  shape  of  special  assessments,  payable  in  10  equal  annual 
instalments  (with  6%  interest),  and  $3,000  is  to  be  paid  by  the 
city.  A  contract  is  awarded  covering  the  construction,  the 
contractor  being  paid  on  completion  of  the  street  by  the  proceeds 
of  bonds  issued,  of  which  $3,000  are  a  direct  municipal  obligation 
and  $12,000  are  in  the  form  of  a  lien  against  the  property  bene- 
fited, guaranteed  by  the  city.  The  bonds  are  serial,  maturing 
over  a  period  of  10  years,  and  bear  5%  interest.  Each  year  i/io 
of  the  bonds  fall  due  and  are  paid  together  with  interest  by  the 
annual  instalment  on  special  assessments  received  with  interest 
from  the  taxpayer  and  by  the  direct  obligation  bonds  and  interest 
paid  by  the  general  fund. 

The  balance  sheet  appears  as  follows : 

Exhibit  B 

Special  Assessment  Fund 

Assets 

Cash  on  Hand  and  in  Banks $    iso,ooo.cx> 

Special  Assessments  Receivable: 

Current  Instalment $  50,000.00 

Less:  Reserve  for  Uncollectible 1,000.00  49,000.00 

Special  Assessments  Receivable  Deferred. . .     $450,000.00 
Less:  Reserve  for  Uncollectible 10,000.00         440,000.00 

Assessable  Construction  in  Progress 75,000.00 

Land,  Buildings,  and  Equipment  (net  of  depreciation) . . .  300,000.00 

Total $1,014,000.00 

Liabilities 

Audited  Vouchers $     25,000.00 

Contracts  Payable 30,000.00 


MUNICIPAL  ACCOUNTING  S^? 

Special  Assessment  Bonds  (portion  due  presently) : 

Municipal 10,000.00 

Guaranteed 45,000.00 

Special  Assessment  Bonds  (other): 

Municipal 80,000.00 

Guaranteed 200,000.00 

Loan  from  Sinking  Fund 140,000.00 

Total $  530,000.00 

Proprietorship 

Excess  of  Assets  over  Liabilities $  484,000.00 


Budget  Position 

Excess  of  Cash  over  Immediate  Demands  for  Cash $  40,000.00 

Available  Balance 49,000.00 

Non- Available  Balance 440,000.00 

Bonds  Authorized  and  Unissued 100,000.00 

Estimated  Revenues 100,000.00 

Total $729,000.00 

Reserve  for  Contracts $175,000.00 

Unexpended  Balance  of  Appropriations 15,000.00 

Reserve  for  Special  Assessment  Bonds  and  Loans  in  Antici- 
pation of  Special  Assessment 420,000.00 

Total $610,000.00 

Budget  Surplus $119,000.00 


Reserve  for  Bonds  Authorized  and  Un- 
issued    $100,000.00 

Reserve  for  Non- Available  Balance* 20,000.00 

Unappropriated  Surplus 1,000.00 


$ii9,ooo.oot 


*  In  excess  of  Reserve  for  Special  Assessment  Bonds  not  presently  due. 
t  Reconciled  to  balance  sheet  surplus  as  follows : 

Balance  Sheet  Surplus 1484,000.00 

Add: 

Estimated  Revenues 100,000.00 

Bonds  Authorized  and  Unissued 100,000.00     $684,000.00 

Less: 

Reserve  for  Purchase  Orders $  15,000.00 

Reserve  for  Contracts 175,000.00 

Excess  of  Fixed  Assets  over  Fixed  Liabilities 375,000.00       565,000.00 

Budget  Surplus  as  above $1 19,000.00 


568  ACCOUNTING— THEORY  AND  PRACTICE 

The  following  journal  entries  illustrate  the  manner  in  which 
the  peculiar  accounts  are  handled : 

I .  Regular  Accounts 

(a)  To  enter  contracts  for  construction  of  improve- 

ments : 
Debit: 

Construction    in    Progress  —  Non-Assess- 
able 
Construction  in  Progress — Assessable 
Credit: 
Contracts  Payable 

(b)  To  enter  bonds  issued  to  finance  contracts: 

Debit: 
Cash 
Credit: 

Special  Assessment   Bonds.      The  bonds 

are  of  two  classes,  as  follows : 
(i)  Direct  liability  bonds  issued  to  pay  for 
municipality's  portion  of  construction 
of,  for  instance,  street  intersections, 
which  are  payable  by  city  as  a 
whole. 
(2)  Guaranteed  bonds  issued  to  pay  prop- 
erty-owners' portion. 

(c)  To  enter  payment  of  contracts: 

Debit: 

Contracts  Payable 
Credit: 

Cash 

(d)  To  enter  assessment  of  improvements: 

Debit: 

Special  Assessments  Receivable 
Credit: 

Revenue  from  Special  Assessments 


MUNICIPAL  ACCOUNTING  569 

(e)  To  enter  cash  received  from  taxpayers  and  from 

general  fund  for  municipality's  bonds  falling  due : 
Debit: 
Cash 
Credit : 

Special  Assessments  Receivable 

Interest  on  Deferred  Special  Assessments 

Receivable 
Special  Assessment  Bonds  Paid  by  General 
Fund 

(f )  To  enter  annual  payment  on  bonds  and  interest  due : 

Debit: 

Special  Assessment  Bonds 
(i)  Direct  Liability 
(2)  Guaranteed 
Interest  on  Guaranteed  Bonds  (interest  on 
direct  liability  bonds  is  paid  from  the 
general  fund) 
Credit: 
Cash 
Budget  Accounts 

(a)  To  enter  special  assessment  budget: 
Debit: 
Estimated    Revenues    and    Non-Revenue 
Receipts 

(i)    Revenues  from  Special  Assessment* 
(2)     Non-Revenue — Direct      Obligation 
Bonds 
Credit : 
Appropriations  for  Improvements 
(i)  Assessable 
(2)  Non-Assessable 
Appropriations  for  Interestf 


•  Including  interest  on  deferred  special  assessments. 

t  On  guaranteed  special  assessment  bonds.     Principal  and  interest  on  direct  liability 
special  assessment  bonds,  payable  from  general  fund. 


570  ACCOUNTING— THEORY  AND  PRACTICE 

(b)  To  enter  contracts  as  awarded : 

Debit: 

Appropriations 
Credit: 

Reserve  for  Contracts 

(c)  To  enter  bond  issues  authorized : 

Debit: 

Bonds  Authorized  and  Unissued 
Credit: 

Reserve  for  Bonds  Authorized  and  Unissued 

(d)  To  enter  sale  of  bonds : 

Debit: 

Excess  of  Cash  over  Immediate  Demands 
for  Cash 
Credit: 

Bonds  Authorized  and  Unissued 
Debit: 

Reserve  for  Bonds  Authorized  and  Unissued 
Credit: 
Estimated    Non-Revenue    Receipts    from 

Direct  Liability  Bonds 
Reserve  for  Special  Assessment  Bonds  ir 
Anticipation  of  Special  Assessments 

(e)  To  enter  payment  of  contracts: 

Debit: 

Reserve  for  Contracts 
Credit: 

Excess  of  Cash  over  Immediate  Demand 
for  Cash 

(f)  To  enter  special  assessments  levied: 

Debit: 

Non- Available  Balance* 
Credit: 

Revenues  from  Special  Assessment 


*  As  each  instalment  comes  due  it  is  transferred  to  Available  Balance. 


MUNICIPAL  ACCOUNTING  57^ 

(g)  To  enter  cash  received  from  instalments  on  special 
assessments : 
Debit: 
Excess  of  Cash  over  Immediate  Demands  for 
Cash 
Credit: 
Available  Balance 

Estimated    Revenues    from    Interest    on 
Special  Assessments  Receivable 
(h)  To  enter  guaranteed  bonds  retired : 
Debit: 

Reserve  for  Special  Assessment  Bonds  in 
Anticipation  of  Special  Assessments 
Credit: 
Excess  of  Cash  over  Immediate  Demands 
for  Cash 

Utility  Fund 

The  utility  fund  covers  the  only  "profit  and  loss"  enterprises 
of  the  municipality.  Inasmuch  as  all  citizens  are  not  necessarily 
consumers  it  becomes  necessary  in  fixing  utility  rates  to  dis- 
tinguish between  the  equities  of  the  consumer  and  the  taxpayer. 
To  do  justice  between  the  two  classes  the  following  rules  must  be 
observed : 

1 .  Rates  must  be  fijted  at  such  a  point  as  will  cover  operation, 
maintenance,  depreciation,  taxes  (paid  to  the  general  fund) ,  and 
interest  (or  profit)  on  the  municipahty's  investment  in  the  utility. 

2.  Interest  and  principal  on  utility  bonds  must  be  paid  by  the 
general  fund. 

3.  Capital  outlay  must  be  paid  by  bond  issue  or  from  the 
general  fund. 

4.  The  municipality  as  a  whole  must  pay  to  the  utility  fund  a 
fair  rate  for  all  services  rendered,  such  as  hydrant  rental,  street 
lighting,  etc. 

The  balance  sheet  of  the  utility  fund  appears  as  follows: 


572  ACCOUNTING— THEORY  AND  PRACTICE 

Exhibit  C 

Utility  Fund 

Assets 

Cash  on  Hand  and  in  Banks $      75,000.00 

Accounts  Receivable $125,000.00 

Less:  Reserve  for  UncoUectibles 5,000.00  120,000.00 

Prepaid  Expenses 1,000.00 

Stores 20,000.00 

Fixed  Assets  (less  depreciation) i  ,000,000.00 

Total $1,216,000.00 

Liabilities 

Audited  Vouchers $      25,000.00 

Revenues  Received  in  Advance 10,000.00 

Interfund 25,000.00 

Total $      60,000.00 

Proprietorship 

Excess  of  Assets  over  Liabilities ^1,156,000.00 

Budget  Position 

Excess  of  Cash  over  Immediate  Demands  for  Cash $     25,000.00 

Available  Balance 120,000.00 

Non-Available  Balance 11,000.00 

Estimated  Revenues 25,000.00 

Total $    181,000.00 

Reserve  for  Purchase  Orders $      20,000.00 

Unexpended  Balance  of  Appropriations 15,000.00 

Total $     35,000.00 

Budget  Surplus .' $    146,000.00 

Reserve  for  Non- Available  Balance $  11,000.00 

Unappropriated  Surplus 135,000.00  $    146,000.00" 


*  Reconciled  to  balance  sheet  surplus  as  follows: 

Balance  Sheet  Surplus Ji,  156,000.00 

Add: 

Estimated  Revenues 25,000.00     Ji, 181, 000.00 

Less: 

Reserve  for  Unexpended  Balances S      15,000.00 

Reserve  for  Purchase  Orders 20,000.00 

Fixed  Assets 1,000,000.00       1,035,000.00 

Budget  Surplus  as  above I    146,000.00 


MUNICIPAL  ACCOUNTING  573 

Capital  Fund 

The  balance  sheet  of  the  capital  fund  is  as  follows: 
Exhibit  D 
Capital  Fund 
Assets 

Cash  on  Hand  and  in  Banks $      70,000.00 

Stores 50,000.00 

Land,  Buildings,  Machinery,  and  Equipment  (net  of  de- 
preciation)    3,000,000.00 

Construction  in  Progress 100,000.00 

Total $3,220,000.00 

Liabilities 

Audited  Vouchers $     25,000.00 

Contracts  Payable 30,000.00 

Bonded  Indebtedness  (maximum  limitation,  $2,000,000)  1,200,000.00 

Total $1,255,000.00 

Proprietorship 

Excess  of  Assets  over  Liabilities $1,965,000.00 

Budget  Position 

Excess  of  Cash  over  Immediate  Demands  for  Cash $      15,000.00 

Non-Available  Balance 50,000.00 

Bonds  Authorized  and  Unissued 150,000.00 

Total $    215,000.00 

Reserve  for  Purchase  Orders $      25,000.00 

Reserve  for  Contracts 10,000.00 

Unexpended  Balances  of  Appropriations 100,000.00 

Total $    135,000.00 

Budget  Surplus $     80,000.00 

Reserve  for  Non- Available  Balance $50,000.00 

Unappropriated  Surplus 30,000.00  $     80,000.00" 


♦  Reconciled  to  balance  sheet  surplus  as  follows : 

Balance  Sheet  Surplus $1,965,000.00 

Add: 

Bonds  Authorized  and  Unissued 150.000.00      12,115,000.00 

Less: 

Reserve  for  Unexpended  Balance  Pur- 
chase Orders  and  Contracts I    135,000.00 

Fixed  Assets  in  Excess  of  Liabilities ....       1,900,000.00       2.035,000.00 
Budget  Surplus  as  abore $      80,000.00 


574  ACCOUNTING— THEORY  AND  PRACTICE 

Sinking  and  Trust  Funds 

The  sinking  fund  and  trust  fund  balance  sheets  appear  as 
follows : 

Exhibit  E 

Sinking  Fund 

Assets 

Cash  on  Hand  and  in  Banks $  25,000.00 

Investments 200,000.00 

Interfund  Loan 140,000.00 

Total $365,000.00 

Liabilities 
Audited  Vouchers $    5,000.00 

Proprietorship 
Excess  of  Assets  over  Liabilities $360,000.00 

Required  Reserve  to  meet  Non-Serial  Bonds    $345,000.00 

Surplus 15,000.00    $360,000.00 

Budget  Position 

Excess  of  Cash  over  Immediate  Demands  for  Cash $  20,000.00 

Available  Balance 200,000.00 

Non- Available  Balance 140,000.00 

Total  Surplus $360,000.00 

Reserve  for  Non-Serial  Bonds $345,000.00 

Unappropriated  Surplus 15,000.00    $360,000.00 


Exhibit  F 

Trust  Fund 

Assets 

Cash  on  Hand  and  in  Banks $15,000.00 

Accounts  Receivable 5,000.00 


MUNICIPAL  ACCOUNTING  575 

Investments 30,000.00 

Interf und  Receivables 10,000.00 

$60,000.00 

Liabilities 

Audited  Vouchers $10,000.00 

Proprietorship 

Excess  of  Assets  over  Liabilities $50,000.00 

Budget  Position 

Excess  of  Cash  over  Immediate  Demands  for  Cash $  5,000.00 

Available  Balance 45,000.00 

Estimated  Revenues 5,000.00 

Total $55,000.00 

Reserve  for  Purchase  Orders $4,000.00 

Unexpended  Balances  of  Appropriations 6,000.00  10,000.00 

Budget  Surplus* $45,000.00 


Consolidation  of  Statements 

The  individual  fund  statements  must  be  consolidated  to  show 
the  financial  condition  as  a  whole.  The  method  of  consolidation 
and  the  resulting  figures  are  shown  in  the  following  schedule  in 
which  all  interfund  items  are  eliminated : 


*  Reconciled  to  balance  sheet  surplus  as  follows: 

Surplus  per  Balance  Sheet f  50,000.00 

Add:  . 

Estimated  Revenues S, 000.00 

ISS.000.00 
Deduct: 

Reserves  for  Purchase  Orders  and  Unexpended  Balances. .  .  10,000.00 

Budget  Surplus  as  above $45,000.00 


576 


ACCOUNTING— THEORY  AND  PRACTICE 


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VOL.  Ill — 37 


578  ACCOUNTING— THEORY  AND  PRACTICE 

Statements  of  Income  and  Outgo 

Statements  of  income  and  outgo  are  also  prepared  for  each 
fund  showing  the  adequacy  of  the  revenues  raised  to  meet  ex- 
penditure in  each  of  the  branches  of  finance.  The  individual 
statements  are  consolidated  to  show  income  and  outgo  of  the 
municipality  as  a  whole.  In  the  consolidated  statement  inter- 
fund  items  are  eliminated.  These  interfund  items  (see  Schedule 
H)  are  as  follows: 

1 .  Payment  made  by  the  utility  fund  to  the  general  fund  of 

taxes  equivalent  to  what  a  privately  operated  company 
would  pay. 

2.  Payment  made  by  the  utility  fund  to  the  general  fund  of 

profit  earned. 

3.  Payment  made  by  the  general  fund  to  the  utility  fund  for 

services  rendered  to  the  municipality. 

4.  Payment  made  by  the  general  fund  to  the  sinking  fund 

covering  annual  instalment  on  non-serial  bonds. 

5.  Payment  made  by  the  general  fund  to  the  trust  fund 

(pensions) . 

These  interfund  items  are  merely  typical  and  not  inclusive. 

The  income  and  outgo  statement  is  accompanied  by  an  analy- 
sis of  the  surplus  accounts  during  the  year  in  which  the  following 
items  appear: 

Credits: 

1 .  Excess  of  income  over  outgo. 

2.  Outlay  during  the  year  is  added  to  the  fixed  assets  as 

follows : 

(a)  Outlay  paid  by  the  general  fund  is  added  to  utility 

or  capital  fund  assets. 

(b)  Outlay  paid  by  the  special  assessment  fund  is  added 

to  special  assessment  fund  assets. 

3.  Bonds  retired  during  the  year  are  credited  to  Special 

Assessment,  Utility,  or  Capital  Surplus,  depending 
upon  the  kind  of  bonds  retired. 


MUNICIPAL  ACCOUNTING 


579 


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MUNICIPAL  ACCOUNTING 


581 


Debits: 

1 .  Excess  of  outgo  over  income. 

2.  Depreciation    on    fixed    assets    except    utility    fixed 

assets. 

3.  Bonds  issued  during  the  year. 


Budget  Statements 

The  status  of  the  budget  estimated  revenue  and  appropriation 
accounts  should  be  reported  at  frequent  intervals  during  the 
year  and  at  its  close.  These  reports  take  substantially  the 
following  form : 

Statement  of  Budget  Accounts 
Revenues 


Revenues* 


Estimated 
Amount 


Realized  to 
Date 


Balance  to  be 
Realized 


Over- 
realization 


Statement  of  Budget  Accounts 
Appropriations 


Expenditures 


Budget 
Appropriation 


Obligated 
to  Date 


Unexpended 
Balance 


Overdraft 


*  And  Non-Revenue  Receipts. 


582  ACCOUNTING— THEORY  AND  PRACTICE 

Indebtedness  Statements 

In  connection  with  the  issuance  and  sale  of  municipal  bonds 
the  accountant  is  called  upon  to  prepare  statements  of  indebted- 
ness upon  the  basis  of  which  is  determined  the  desirabihty  of  the 
bonds  as  an  investment.  The  statement  should  cover  the  ele- 
ments of  credit  supporting  the  bonds,  which  are  as  follows: 

1.  The  population  and  its  character. 

2.  The  industries  of  the  municipality  and  their  character. 

3.  The  assessed  valuation  of  property  in  the  municipality. 

The  relationship  in  terms  of  a  percentage  of  true  value 
to  assessed  value  should  be  shown  as  indicating  the 
extent  to  which  assessments  may  be  increased. 

4.  Net  outstanding  indebtedness  made  up  of  gross  indebted- 

ness less  the  following: 

(a)  Productive  debt,  i.e.,  indebtedness  incurred  for 

projects  which  earn  at  least  interest  on  the  in- 
debtedness. 

(b)  Sinking  funds  on  hand  and  invested  in  securities 

maturing  prior  to  the  issue  covered  by  the  state- 
ment. 

5.  Value  of  property  owned.    This  item  is  relatively  unim- 

portant, since  the  property  is  available  to  pay  indebted- 
ness in  case  of  default  only  to  a  limited  extent. 

6.  Indebtedness  limitation  in   terms  of  a  percentage  of 

assessed  valuation, 

7.  Tax  limitation  in  terms  of  a  percentage  of  assessed 

valuation. 

Cost  Statements 

Cost  statements  are  prepared  for  the  purpose  of  comparing 
total  and  unit  costs  of  construction  and  operation  between  periods, 
methods,  and  departments.  It  should  be  noted  that  depreciation 
must  be  considered  to  arrive  at  true  costs.  The  following  is  a 
typical  example  of  a  cost  statement: 


MUNICIPAL  ACCOUNTING 


583 


Department  of  the  Interior 
United  States  Reclamation  Service 


Project 
Monthly 
Cost 
Report 


Strawberry  Valley  Project 

Feature  Driving  Strawberry  Tunnel  Heading  i 

Month  of  January,  19 12 


Acct. 
No. 


760 
761 
762 

763 
764 

765 
766 
767 
768 
769 
770 

771 

772 
773 
774 
775 
776 

777 
778 
779 
780 
781 
782 
783 

784 

785 
786 
787 
788 
789 


Classification 


Labor — • 

Engineering 

Superintendents 

Shift  Bosses 

Timekeepers 

Drillmen  and  Helpers 

Miners 

Muckers 

Track  and  Dumpmen 

Skinners 

Timbermen 

Miscellaneous 

Materials — • 

Powder,  Fuse  and  Caps. . .  . 

Lumber 

Oils,  Candles,  Etc 

Ventilating  Pipe 

Track,  Including  Ties 

Pipe  (Air  Line) 

Drill  Repairs 

Miscellaneous 

Machine  Shop  Expense 

Blacksmith  Shop  Expense. . .  , 

Corral  Expense 

Power 

Plant  Depreciation 

Labor  and  Material — • 

Pumping 

Electrician  and  Blowerman. 

Disabled  Employees 

Equipment  Depreciation 

Camp  Maintenance  Expense. . 

General  Expense 

Diamond  Fork  Road  Mainte- 


Total 


This  Month 


Amount 


$217.80 

216.66 

418.50 

85.00 

1,216.50 


1,134.19 
663.13 

25575 

627.61 

40.25 

795-36 
357-60 

83-33 

205.20 

190.44 

1.32 

97.12 

74.48 

224-57 

242.45 

249.90 

1,370.02 

628.32 

433-87 
102.75 


168.00 
686.76 
651.91 

75-35 


$11,514.14 


Unit 
Cost 


$0.65 
0.64 

1-25 

0.25 
3.62 


3.38 
1.97 

0.76 

1.87 

0.12 

2.36 

1.06 

0.25 
0.61 

0.57 

0.00 
0.29 

0.22 
0.67 
0.72 
0.74 
4.08 
1.87 

1.29 
0.31 


0.50 
2.04 

1-95 
0.23 


$34-27 


Total  to  Date 


Amount 


^71-47 
621.66 

1,245-50 

249-33 

3,809.88 

2,802.46 
1,867.71 

573-40 

2,021.16 

334-08 

1,609.43 
968.31 
298.14 
260.17 

398.91 
130.01 
614.08 
329.69 

424.83 

634-31 

761.04 

2,570.41 

1,136.32 

785-87 
256.51 

341-50 
1,360.64 
1,781-53 

157-23 


$28,815.58 


Unit 
Cost 


$0.56 

0.74 
1.48 
0.30 
4-50 

3-32 
2.21 
0.68 

2-39 
0.40 

1.91 
I-15 
0.35 
0.31 
0.47 
0.15 
0-73 
0-39 
0.50 

0.75 
0.90 

3-05 
1-35 

0-93 
0.30 

0.40 
1.61 
2.12 

0.19 


$34-14 


Work  com- 
menced 


Percentage 
complete 


Estimated  wal^°^^ 


Lowest  total  bid  reed., 
Lowest  unit  bid  reed., 


584 


ACCOUNTING— THEORY  AND  PRACTICE 


Class  of 
Work 

Unit  of 

Measure 

This  Month 

Total  to  Date 

Quantity 

Unit 
Cost 

Quantity 

Unit 
Cost 

Remarks 

Excavat. 

Lin.  Ft. 

336 

$34-27 

844 

$34-14 

Materials: 

Haul: 

Labor: 

Equipment : 

Weather: 

Correct: 

Miscellaneous:.... 

Ross  WoRSLEY,  Bookkeeper. 


Additional  remarks  may  be 
written  on  the  back  hereof. 


Graphic  Statements 

Graphic  representations  are  particularly  valuable  in  con- 
nection with  municipal  accounts  because  of  the  fact  that  they  are 
more  easily  understood  by  citizens  who  are  unfamiliar  with  the 
usual  accounting  statements.  They  may  be  made  up  in  a  variety 
of  ways  to  cover  various  phases  of  the  municipality's  finances. 
Forms  loa  and  b  are  typical  examples. 


Form  10.     (o)  Chart  Showing  General  Revenue  Receipts  of  the  State  For  Fiscal 
Year  Ending  June  30,  IQ— 


MUNICIPAL  ACCOUNTING 


585 


Form  10.     {b)   Chart  Showing  Disbursements  of  the  State  for  Current  Expense 
and  Outlay  For  Fiscal  Year  Ending  June  30,  ig — 


APPENDIX   A 
PRACTICE  WORK  FOR  STUDENT— FIRST  HALF-YEAR 

In  order  to  fix  firmly  in  the  student's  mind  accounting 
principles  and  their  various  applications,  it  is  absolutely  essential 
that  adequate  practice  work  be  provided.  The  problems  of  this 
appendix  are  based  directly  on  the  principles  developed  in  the 
text  of  the  chapter  bearing  the  same  number  as  the  problem 
assignment.  Thus  problem  assignment  I  is  based  on  Chapter  I, 
problem  assignment  II  on  Chapter  II,  etc.  It  manifestly  is  not 
possible  to  incorporate  in  a  problem  all  the  principles  discussed 
in  the  text  and  all  accounting  features  of  that  particular  industry 
as  they  are  met  in  practice.  The  problem  method  is,  however, 
the  nearest  approach  to  actual  conditions  of  practice  which  has 
yet  been  devised.  The  problems  here  given  will  be  found  to 
involve  the  major  points  discussed  and  to  offer  the  student  a 
good  test  of  his  grasp  of  the  principles  that  apply. 

It  is  realized  that  the  work  of  the  first  half-year,  requiring  a 
preparation  of  both  the  text  and  problem  assignments,  is  heavy 
and  will  require  severe  application.  The  student  who  has  pursued 
the  study  of  accounting  as  far  as  the  third  year  will,  however, 
usually  be  looking  forward  to  the  practice  of  professional  account- 
ing and  should  be  willing  to  undergo  the  mental  pains  necessary 
to  give  him  a  sound  basis  for  his  life's  work. 


1.  The  plant  and  the  general  offices  of  the  Wolf-Butler  Manufacturing 
Company  are  located  at  Springfield,  Mass.  Its  seven  branches  are  located 
in  the  Middle  Atlantic  and  Southern  States.  The  extent  of  the  activities 
of  the  business  is  indicated  by  the  fact  that  the  sales  of  the  company  average 
$15,000,000  a  year.  The  president  of  the  company  requests  you  to  make  a 

587 


S88  APPENDIX 

survey  of  its  accounting  methods  for  the  purpose  of  making  suggestions  for 
improving  these  methods  wherever  you  think  necessary. 

Your  investigation  shows,  first,  that  in  the  process  of  expansion  during 
the  last  ten  years  no  definite  effort  has  been  made  to  adapt  the  organization 
or  personnel  of  the  accounting  department  to  the  increased  activities  of  the 
business.  There  is  no  controller,  and  the  man  serving  at  the  head  of  the 
accounting  department  has  been  promoted  from  an  inferior  clerical  position 
in  the  department.  The  inefficiency  of  its  methods  for  collecting  information 
is  evidenced  by  the  fact  that  the  records  show  useless  and  out-of-date 
information,  while  other  necessary  data  are  lacking.  Finally,  with  reference 
to  the  personnel  of  the  department,  you  find  that  the  duties  of  the  staff  are 
not  clearly  defined,  and  that  its  members  frequently  duplicate  each  other's 
work. 

Your  survey  leads  you  to  suggest  the  following  improvements; 

1.  The  appointment  of  a  trained  executive  as  controller,  who  is  to  be 

responsible  for  the  accounting  and  statistical  methods  and  pro- 
cedures of  the  company. 

2.  The  appointment  of  the  following  assistants  to  the  controller: 

(a)  A  group  of  research  assistants  who  will  devote  their  attention 

to  initiating  the  proper  accounting  and  statistical  methods 
which  should  be  adopted  by  the  department.  They  are  also 
to  supervise  the  progress  of  these  methods  and  make  sug- 
gestions for  revisions  whenever  necessary. 

(b)  A  general  auditor  who  will  be  directly  responsible  for  the 

operations  of  the  accounting  department. 

(c)  A  staff  of  assistants  who  will  carry  on  the  specific  functions 

of  the  controller  in  sales,  production,  purchasing,  and 
finance  departments. 

3.  The  organization  of  the  accounting  department  into  the  following 

sections: 

(a)  General  OflSce  Accounting 

(b)  Branch  Accounting 

(c)  Cost  Accounting 

(d)  Tabulating 

(e)  Sales  Classification  and  Analysis 

(f)  Pay-RoU 

(g)  Accounts  Receivable 
(h)  Accounts  Payable 
(i)  Billing 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  589 

4.  The  maintenance  of  the  branch  ledgers  at  the  company's  general 
offices,  and  records  of  original  entry  and  of  customers,  at  the 
branches. 
Required:  Write  a  report  to  the  president  of  the  company  discussing  the 
general  weaknesses  in  the  present  organization  and  methods  of  the  account- 
ing department,  and  explaining  the  new  organization  you  recommend. 
Explain  specifically  the  duties  and  functions  of  the  controller  and  his  three 
groups  of  assistants,  as  well  as  the  various  sections  in  the  accounting  depart- 
ments. Explain  the  relation  of  the  various  sections  to  each  other. 

2.  The  board  of  directors  of  the  Wolf-Butler  Manufacturing  Company 
has  approved  the  recommendations  contained  in  your  report.  The  new 
organization  is  to  become  effective  as  of  June  i.  During  the  month  of  June 
the  following  transactions,  among  others,  took  place: 

1.  Accounts  receivable  collected  by  the  general  office  from  its  own  sales 

$800,000. 

2.  Factory  pay-roll  for  the  month  $300,000. 

3.  Purchases  of  raw  materials  by  the  general  office  $300,000. 

4.  Raw  materials  requisitioned  from  stock  for  use  in  the  factory  $350,060. 

5.  Cost  of  goods  transferred  from  the  factory  to  the  finished  goods  store- 

room $900,000. 

6.  Sales  made  by  the  general  office  as  shown  by  the  billings  of  the  billing 

section  $600,000.  The  billing  section  prepares  invoices  in  triplicate. 
One  is  sent  to  the  customer,  one  to  the  tabulating  section  via 
sales  analysis  section,  and  one  to  the  accounts  receivable  section. 

7.  Sales  by  branches  $1,750,000.  Customers  are  invoiced  by  the  branches, 

goods  shipped  from  branch  inventories,  and  collections  made  by  the 
branches. 

8.  Collections  on  account  by  the  branches  $1,450,000.  Each  branch  has  a 

working  fund  of  $15,000,  which  is  replenished  by  the  general  office. 
All  collections  are  deposited  to  the  credit  of  the  general  office. 

9.  Expenses  paid  by  the  branches  $580,000. 

10.  Merchandise  shipped  by  the  general  office  to  the  branches  $1,600,000. 

All  merchandise  is  billed  to  the  branches  at  cost. 

11.  Charged  to  the  branches  for  the  month  by  the  general  office  for  interest 

on  investment  $18,000. 

12.  Charged  to  the  branches  by  the  general  office  for  overhead  expenses  at 

the  general  office  $17,500. 

13.  General  office  expenses  $35,000.  A  voucher  record  is  maintained  by  the 

company. 

14.  Machinery  purchased  by  the  general  office  for  the  factory  $20,000. 


590  APPENDIX 

15.  Additional  automobile  trucks  purchased  by  the  general  office  for  the 

New  York  branch  $25,300.     These  are  b-llcd  to  the  branch  and 
are  to  be  paid  for  by  it. 

16.  Accounts  payable  paid  by  the  general  office  $400,000  for  the  pre- 

ceding period  as  well  as  the  current. 

Required:  Explain  in  writing  how  each  of  these  transactions  will  be 
handled  by  the  Wolf-Butler  Manufacturing  Company,  tracing  the  transac- 
tion from  its  origin  until  its  effect  is  shown  on  the  general  ledger.  In  your 
explanation: 

(a)  State  the  section  of  the  accounting  department  which  will  first 

have  to  deal  with  it. 

(b)  State  each  section  which  will  be  affected  by  it  and  the  manner  in 

which  it  will  be  affected. 

(c)  State  each  ledger  on  which  the  transaction  will  be  shown  and  show 

in  journal  form  the  entry  to  be  made  on  the  ledger. 

Each  group  of  transactions,  such  as  sales,  purchases,  etc.,  will  be  regarded 
as  one  transaction  for  the  purpose  of  this  problem. 

II 

1.  Discuss  the  financial  condition  of  the  company  submitting  the  follow- 
ing statement  when  applying  for  a  loan  at  its  bank: 

Quick  Assets: 

Cash $  20,000 .  00 

Notes  Receivable 1 2,000 .  00 

Accounts  Receivable,  Less  Reserve 70,000 .  00 

Liberty  Bonds — Equity io,ooo .  00 

Total  Quick  Assets $1 1 2,000 . 00 

Current  Liabilities: 

Notes  Payable $  15,000 .  00 

Accounts  Payable 15,000 .  00 

Total  Current  Liabilities $  30,000 .  00 

Excess — Quick $  82,000.00 

Ratio 3-73 

Invested,  Fixed,  and  Other  Assets: 

Machinery,  Equipment,  and  Fixtures $     5,000 . 00 

Supplies,  Samples,  etc i  ,000 .  00 

Total,  Invested,  Fixed,  and  Other  Assets $    6,000.00 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  591 

Other  Liabilities  and  Reserves : 

General  Reserve $    3,000 .  00 

Total  Other  Liabilities  and  Reserves $    3,000 .  00 

Net  Worth: 

Permanent  Investment $  85,000 .  00 


$  85,000.00 


Summary: 
Assets: 

Quick $112,000. 00 

Invested,  Fixed,  and  Other  Assets 6,000.00 

Total $1 18,000 .  00 

Liabilities,  Reserves  and  Capital: 

Current  Liabilities $  30,000 .  00 

Reserves 3,000 .  00 

Net  Worth 85,000 .  00 

Total $1 18,000 .  00 

The  following  additional  information  is  available: 

The  business  consists  of  the  marketing  of  dairy  farm  products  on  a  com- 
mission basis.  Arrangements  are  made  with  a  farmer  to  sell  his  products 
upon  their  delivery  to  the  merchant,  who  takes  no  responsibility  for  the 
value  or  condition  of  the  merchandise  when  not  immediately  sold.  Accord- 
ingly, no  inventory  is  usually  carried.  In  fact,  an  inventory  in  such  an 
undertaking  would  raise  the  suspicion  in  the  mind  of  one  examining  the 
statement  that  the  merchant  was  dealing  for  his  own  account.  This  is  not 
always  looked  upon  favorably  in  the  case  of  the  commission  business,  as  in 
most  cases  the  capital  invested  is  not  sufficient  to  carry  on  operations  as 
principal.  A  slight  reverse  in  the  market  would  involve  the  commission 
merchant  if  he  attempted  to  do  business  for  his  own  account  with  his  limited 
capital. 

2.  Discuss,  from  the  standpoint  of  the  bank  approached  for  a  loan,  the 
financial  condition  revealed  by  the  following  statement: 

Quick  Assets: 

Cash $    150,000 .  00 

Advances  on  Purchases  and  Consigrmients 900,000 .  00 


592  APPENDIX 

Merchandise,  Less  Reserve 750,000 .  00 

Liberty  Bonds — Equity 200,000 .  00 

Total  Quick  Assets $2,000,000.00 

Current  Liabilities: 

Notes  Payable — Banks $1,500,000.00 

Accounts  Payable 15,000.00 

Accrued  Items '. 10,000 .  00 

Advances  vs.  Sales 150,000,00 

Reserved  for  Taxes,  etc 7S»ooo  ■  00 

Due  Allied,  Controlled  Companies 10,000.00 

Total  Current  Liabilities $1,760,000 .  00 

Excess — Quick $    240,000 .  00 

Ratio 1 .  14 

Invested,  Fixed,  and  Other  Assets: 

Investments $        5,000 .  00 

Lands,  Buildings,  Plants 650,000 .  00 

Machinery,  Equipment  and  Fixtures 30,000.00 

Trade-Marks,  Formulas,  Good-Will 50,000.00 

Due  from  Stockholders,  OflScers  and  Employees 50,000 .  00 

Deferred  Charges 40,000 .  00 

Exchange  Membership 40,000 .  00 

Sundry  Accounts  and  Notes  Receivable 25,000.00 

Total  Invested,  Fixed,  and  Other  Assets $    890,000 .  00 

Other  Liabilities  and  Reserves: 

Real  Estate  Mortgages,  Bonded  Debt,  etc $    150,000.00 

Reserve  for  Depreciation  of  Plant  and  Property 10,000.00 

Total  Other  Liabilities  and  Reserves $    160,000 .  00 

Excess — Invested,  Fixed,  etc $    730,000.00 

Ratio 5.56 


Capital  Account: 

Capital  Stock — Outstanding $  500,000 .  00 

Surplus 175,000.00 

Surplus  due  to  Appreciation 295,000 .  00 

Total  Capital  Account $  970,000 .  00 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  593 

Summary: 
Assets: 

Quick $2,ooo,cxx} .  cxi 

Invested,  Fixed,  and  Other 890,000 .  00 

Total $2,890,000 .  00 

Liabilities,  Reserves  and  Capital: 

Current  Liabilities • $1,760,000.00 

Other  Liabilities  and  Reserves 160,000.00 

Capital  Account  (Net  Worth) 970,000.00 

Total $2,890,000 .  00 

Contingent  Liability $2,000,000 .  00 

This  additional  information  is  available: 

The  company  conducts  a  grain  elevator  and  commission  business.  The 
previous  year's  statement  showed  the  following  items: 

Merchandise,  Less  Reserve $550,000.00 

Equity  in  Elevators 250,000 .  00 

Notes  Payable  to  Banks ' 500,000 .  00 

Advances  on  Purchases  and  Consignments 100,000 .  00 

Decrease  in  Net  Earnings 100,000.00 

During  the  last  year  $295,000  was  added  to  the  asset  values  of  the  elevators 
of  the  company.  The  values  were  considered  to  be  in  excess  of  book  figures 
to  this  extent.  This  amount  was  credited  to  surplus  account,  bringing  the 
balance  of  that  account  up  to  $470,000. 

Adequacy  of  the  insurance  carried  must  always  be  considered. 

3.  Discuss  the  financial  condition  revealed  by  the  following  statement  of 
a  chemical  company: 

Quick  Assets: 

Cash $  S,ooo .  00 

Accounts  Receivable,  Less  Reserve 30,000.00 

Merchandise,  Less  Reserve 75,000.00 

Total  Quick  Assets $    110,000.00 

Current  Liabilities: 

Notes  Payable — Banks $  10,000 .  00 

Notes  Payable — Others 5,000. 00 

Accounts  Payable 40,000. 00 

Accrued  Items i  ,000 .  00 


594  APPENDIX 

Due  to  Allied,  Controlled,  Affiliated  Companies 1,000.00 

Dividends  Accrued 40,000 .  00 

Total  Current  Liabilities $     97,000 .  00 

Excess — Quick $      13,000.00 

Ratio 1 .  13 

Invested,  Fixed,  and  Other  Assets: 

Investments $     50,000 .  00 

Machinery,  Equipment  and  Fixtures 510,000.00 

Due  from  Stockholders,  Officers,  and  Employees 40,000 .  00 

Deferred  Charges 5,000.00 

Total  Invested,  Fixed,  and  Other  Assets $   605,000.00 

Other  Liabilities  and  Reserves: 

Real  Estate  Mortgages,  Bonded  Debt,  etc $      10,000.00 

Total  Other  Liabilities  and  Reserves $     10,000 .  00 

Capital  Account: 

Capital  Stock  Outstanding $1,500,000 .  00 

Deficit 892,000 .  00 

Total  Capital  Account $   608,000.00 

Summary: 
Assets: 

Quick $    1 10,000 .  00 

Invested,  Fixed,  and  Other 605,000.00 

Total $    715,000.00 

Liabilities,  Reserves,  and  Capital: 

Current  Liabilities $      97,000 .  00 

Other  Liabilities  and  Reserves io,ooo .  00 

Capital  Account  (Net  Worth) 608,000 .  00 

Total $    715,000.00 

This  additional  information  is  available: 

The  conditions  in  the  chemical  and  dye  industry  in  recent  years  have  been 
very  poor,  some  concerns  having  failed  and  others  being  in  severe  financial 

difficulties.  Merchandise  could  not  be  disposed  of  at  prices  even  considerably 
less  than  cost.    Consequently,  stock  either  had  to  be  sacrificed  or,  where 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  595 

possible,  used  as  collateral  upon  loans,  pending  the  development  of  a  favor- 
able market. 

The  $50,000  "Investments"  shown  above  represent  the  balance  of  power 
for  control  in  a  $500,000  corporation,  with  which  a  large  business  has  been 
carried  on.  This  company  has  outstanding  bonds  inconsiderable  amount, 
which  mature  within  the  next  12  months. 

There  is  no  preferred  stock,  the  issue  being  all  of  one  class. 

4.  Discuss  the  financial  condition  revealed  by  the  following  statement  of 
a  mercantile  and  commission  business  dealing  in  a  basic  commodity: 

Quick  Assets: 

Cash $    500,000 .  00 

Notes  Receivable 200,000 .  00 

Accounts  Receivable 200,000 .  00 

Merchandise 2,000,000.00 

Total  Quick  Assets $2,900,000.00 

Current  Liabilities: 

Notes  Payable — Banks $1,500,000 .  00 

Notes  Payable — Others 50,000 .  00 

Acceptances  Payable 150,000 .  00 

Accounts  Payable 150,000 .  00 

Accounts  Payable — Consignments 300,000 .  00 

Due  to  Employees 7S>ooo .  00 

Reserve  for  Income  Tax 100,000 .  00 

Total  Current  Liabilities $2,3 25,000 . 00 

Excess — Quick , $    575,000 . 00 

Ratio 1.25 

Invested,  Fixed,  and  Other  Assets: 

Investments $      10,000.00 

Machinery,  Furniture,  Fixtures 35,000.00 

Due  from  Stockholders,  Officers,  and  Employees 65,000.00 

Miscellaneous  Accounts  Receivable 40,000.00 

Total  Invested,  Fixed,  and  Other  Assets  $    150,000 .  op 

Reserves: 
Reserve  for  Depreciation  of  Plant $      10,000 .  00 

Total  Reserves $      10,000 .  00 


596  APPENDIX 

Capital  Account: 

Capital  Stock  Outstanding $    500,000.00 

Surplus 215,000.00 

Total  Capital  Account $    715,000 .  00 

Summary: 
Assets: 

Quick $2,900,000 .  00 

Invested,  Fixed,  and  Other  Assets 150,000.00 

Total $3,050,000 .  00 

Liabilities,  Reserves,  and  Capital: 

Current  Liabilities $2,325,000.00 

Other  Liabilities  and  Reserves 10,000.00 

Capital  Account  (Net  Worth) 715,000.00 


$3,050,000.00 


This  additional  information  is  available:  The  nature  of  the  business 
requires  the  company  practically  to  finance  the  producers  for  a  limited 
period  each  season.  To  do  this  the  necessary  funds  must  be  borrowed  from 
banks.  The  above  balance  sheet  is  issued  about  the  time  when  the  buying 
of  the  commodity  by  the  company  ordinarily  takes  place. 

Naturally,  the  major  part  of  the  liabilities  would  be  for  purchases  and 
would  therefore  be  included  in  the  current  liabilities.  The  item.  Miscel- 
laneous Accounts  Receivable,  $40,000,  has  been  set  up  separately  under 
Other  Assets,  as  it  represents  other  than  trade  accounts.  The  same  pro- 
cedure was  followed  with  the  amount  due  from  stockholders,  officers,  and 
employees. 

This  balance  sheet  clearly  indicates  the  treatment  accorded  accounts 
owing  from  or  to  parties  interested  in  the  corporation  either  as  owners, 
managers,  or  workers.  The  amount  shown  as  Due  to  Employees  was 
segregated.  Originally  in  the  balance  sheet  this  was  included  in  the  total  of 
Accounts  Payable. 

m 

The  International  Exchange  Company  is  a  firm  of  private  bankers  trans- 
acting a  foreign  exchange  business  in  New  York.  The  condition  of  their 
accounts  at  the  close  of  business  December  30,  19 — ,  is  shown  by  the 

following  list: 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  597 

Debit  Interest  and  Discount $      1 1,485  ■  60 

Due  to  Foreign  Banks  and  Bankers  (Nostro)  (Overdraft) 325,640.91 

Foreign  Specie 2,675  •  5° 

Managers'  Salaries 15,600 .  00 

Our  Acceptances  on  Hand 83,000 .  00 

Accrued  Interest  Payable 640 .  36 

Cash 865,450 .  00 

Loss  on  Reichsmarks 6,413 .  91 

Accrued  Interest  on  Loans  Receivable 6,540 .  50 

Long  Drafts  on  Foreign  Correspondents 750,890.00 

Foreign  and  Domestic  Bills  Rediscounted 2,460,094 .  86 

Profit  on  Sterling  Exchange 87,891 .  30 

Commission  Account  (Commissions  Earned) 6,651 .37 

Due  us  from  Banks  and  Bankers  (Nostro  Accounts) 1,436,865 .  27 

Due  us  from  Banks  and  Bankers  (Dollar  Accounts) 39S>745  30 

Due  to  Customers  for  Exchange  Bought 40,150. 16 

Commissions,  Travelers'  Letters  of  Credit  (Earned) 671 .  10 

Commissions,  Commercial  Letters  of  Credit  (Earned) 42,111 .  15 

Commissions,  Dollar  Accounts  (Earned) 2,816. 14 

Capital 1,760,930.40 

Unpresented  Foreign^Drafts 48,300 .  00 

Interest  on  Nostro  Accounts  (Earned) 3,615.66 

Foreign  and  Domestic  Bills  Discounted 2,460,094.86 

Commercial  Letters  of  Credit  Issued  (Time  and  Domestic) 2,260,485.94 

Commercial  Letters  of  Credit  Issued  (Foreign) 1,130,340. 16 

Commercial  Letters  of  Credit  Issued  (Foreign  Correspondents)..  . .  218,899.71 

Interest  on  Dollar  Accounts  Paid  Out 2,140. 16 

Profit  on  Money  Currency  Transactions 1,510.00 

Nostro  Accounts  Interest  on  Claims  Receivable 3,986.45 

Dollar  Drafts  Drawn 36,000 .  00 

Foreign  Investments — Securities 765,540.00 

Foreign  Investments — Time  Bills  of  Exchange 1,060,755  •  85 

Due  to  Foreign  Banks  and  Bankers — Dollar  Accounts 1,461,330.50 

Earnings  on  Foreign  Investments 7,816 .  10 

Deposits  Reserved  Against  Bills  of  Exchange 36,416 .  93 

Deposits  Reserved  Against  Travelers'  Letters  of  Credit 42,502 .  16 

Deposits  Reserved  Against  Commercial  Letters  of  Credit 530,640. 20 

Commercial  Acceptances  on  Hand  at  Bank 165,360. 58 

Bankers'  Acceptances  on  Hand  at  Bank 251,430.45 

Cable  Expenses 4,696 .  70 

Office  Expenses 58,360 .  19 

Customers'  Liability  on  Acceptances 8,196,854.65 

Customers'  LiabiUty  on  Travelers'  Letters  of  Credit 65,879.46 

Customers'  Liability  on  Commercial  Letters  of  Credit 3*609,725 .81 


598  APPENDIX 

Earnings  on  Bullion  Trading  Account t       2,165. 14 

Liability  on  Acceptances — Domestic  Shipments 1,340,320. 76 

Liability  on  Acceptances — Foreign  Shipments 5,942,503 .  ai 

Liability  on  Acceptances  by  Foreign  Correspondents 914,030.68 

Earnings  from  Brokerage  Transactions 8,740 .  16 

Travelers'  Letters  of  Credit  Issued 65,879.46 

Advances  on  Time  Bills  (made  to  customers 142,175.67 

Profit  on  Guilders  Account 34,638 .  71 

Profit  on  Francs  Exchange  Transaction 19,460. 15 

Travelers'  Letters  of  Credit  Checks  Outstanding 26,516.89 

Credit  Interest  and  Discount 36,950 .  86 

Due  us  from  Customers  for  Exchange  Sold 15,448 .  62 

Gold  Shipments 21,325 .60 

On  the  last  day  of  the  year  the  following  transactions  take  place: 

The  firm  purchases  £50,000, 60-daysterlingbillsat  3.6s>^,and  transmits 
them  to  its  London  correspondent  with  instructions  to  discount  them  and 
place  the  proceeds  to  the  firm's  credit.  The  discount  rate  prevailing  in 
London  is  4K%'  A  stamp  charge  of  i  /20%  is  charged  by  the  correspondent. 

Cable  transfers  on  London  are  selling  in  New  York  at  $3.72,  while  they 
are  quoted  in  Paris  at  46  francs  per  pound.  Cable  transfers  on  Paris  are 
quoted  in  New  York  at  7.76  cents.  The  firm  orders  its  Paris  correspondent 
to  purchase  £7,500  and  remit  them  to  its  London  correspondent. 

The  firm  receives  for  collection  from  its  Brazilian  correspondent  a  90-day 
draft  amounting  to  $50,000,  drawn  by  the  Brazil  Exporting  Company,  with 
instructions  to  discount  it  and  purchase  90-day  sterling  with  the  proceeds. 
The  market  rate  of  discount  for  90-day  bills  is  5%,  and  the  rate  for  90-day 
sterling  bills  is  $3.64. 

The  firm  receives  2,500  ounces  of  gold  from  its  London  correspondent  to 
be  sold  and  proceeds  credited  to  the  latter's  account.  The  gold  is  sold  at 
$20.67  per  ounce. 

Travelers'  letters  of  credit  issued  during  the  day  amount  to  £15,000,  for 
which  the  applicants  are  charged  at  the  rate  of  $3.70  plus  a  commission 
of  1%. 

Travelers'  checks  sold  amount  to  $2,564.69,  with  a  commission  charge 
of  K%. 

go-day  sight  drafts  under  commercial  letters  of  credit  amounting  to 
$25,650.46  are  accepted.    These  cover  domestic  shipments. 

The  banking  house  is  informed  by  its  foreign  correspondent  that  its 
account  is  charged  for  $35,678.95  for  acceptances  on  foreign  shipments 
made  by  the  correspondent  for  its  account. 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  599 

The  house  receives  $169,755.44  from  customers  as  payment  for  accept- 
ances under  commercial  letters  of  credit. 

It  issues  a  letter  of  credit  for  $150,000  for  importation  of  products  from 
France,  to  be  availed  of  by  means  of  60-day  sight  drafts  accompanied  by 
documents. 

A  deposit  of  $60,000  is  received  from  the  Commercial  Import  Company  as 
collateral  against  drafts  to  be  accepted  by  the  banking  house  under  letters 
of  credit. 

The  house  buys  back  $175,000  of  its  own  acceptances  in  the  open  market 
to  hold  them  till  maturity. 

The  folio wmg  expenses  are  paid:  cable  expenses  $390,  office  salaries 
$4,748.50,  telephone  and  telegraph  tolls  $265.30. 

(a)  Prepare  a  trial  balance  as  of  December  31,  19 — . 

(b)  Draw  up  a  pro-forma  balance  sheet  and  statement  of  profit  and  loss 
as  of  December  31,  19 — ,  taking  cognizance  of  the  following  analysis  of 
office  expenses  as  on  December  31: 

OflSce  Salaries $50,229. 25 

Stationery  and  Printing 1,260. 75 

Legal  Expenses 425 .  00 

Postage 259 .  94 

Telephone  and  Telegraph 1,785 .  25 

Rent 4,400.00 


$58,360.19 

IV 

1.  Draw  up  a  pro-forma  balance  sheet,  a  summary  statement  of  profit 
and  loss,  and  a  statement  of  cash  from  the  following  information: 

The  condition  of  the  Dollar  Savings  Bank  on  December  31, 19 — ,  as  shown 
by  the  postclosing  trial  balance,  is: 

Cash  on  Hand $       603,419 .  61 

Cash  on  Deposit  in  Other  Banks , 2,242,313 .08 

Banking  House 220,000 .  00 

Other  Real  Estate 29,690.00 

Bonds  and  Mortgages 49,249,235 .00 

Liberty  Bonds 16,817,648.63 

Railroad  Mortgage  Bonds 4,848,781 .34 

New  Mexico  State  Bonds 2,416,943 .05 

Utah  State  Bonds 4,206,310.00 

Massachusetts  State  Bonds 1,934,876 .  21 

Albany  Improvemeut  Bonds 3,003,404.06 


6oo  APPENDIX 

Boston  Bonds $  4,268,513 .go 

Genesee  Township  (N.  Y.)  Bonds 5,112,010.03 

Jackson  County  (Miss.)  School  Bonds 1,836,110.00 

Flatbush  (N.  Y.)  Assessment  Bonds 3,564,809.91 

Ticonderoga  (N.  Y.)  Bonds 3,682,492 .34 

Mansfield  (Ohio)  Water  Works  Bonds 634,940.03 

Loans  on  Pass-Books 1,563,908.09 

Deferred  Insurance 6,840 .  07 

Accrued  Interest 845,071 .  13 

Deposits $92,292,689.76 

Surplus 14,794,626.72 


$107,087,316.48    $107,087,316.48 

Six  months  later  the  following  trial  balance  is  taken  from  the  books  before 
closing: 

Debit  Credit 

Cash  on  Hand $       650,004 .  16 

Cash  on  Deposit  in  Other  Banks 3,084,455 .  57 

Banking  House 220,000 .  00 

Other  Real  Estate 34,160.00 

Bonds  and  Mortgages 50,788,455 .00 

Liberty  Bonds 20,578,461 .65 

Railroad  Mortgage  Bonds 4,844,724.41 

New  Mexico  State  Bonds 2,430,819.04 

Utah  State  Bonds 4,600,347 .  52 

Massachusetts  State  Bonds 1,810,775 .65 

Albany  Improvement  Bonds 942,676 .  76 

Boston  Bonds 3,114,411.67 

Genesee  Township  (N.  Y.)  Bonds 1,249,773.40 

Jackson  County  (Miss.)  Bonds 2,142,420. 21 

Flatbush  (N.  Y.)  Assessment  Bonds. 2,222,314. 19 

Ticonderoga  (N.  Y.)  Bonds 3,168,393 .39 

Mansfield  (Ohio)  Water  Works  Bonds 3,616,246.81 

Richland  County  (Ohio)  Bonds 1,346,780.95 

Sullivan  County  (N.  Y.)  Bonds 3,785,967 .96 

Loans  on  Pass-Books 1,565,818.36 

Deferred  Insurance 8,923 .31 

Deposits $96,239,659.62 

Surplus 14,794,626.72 

Interest  on  Stocks  and  Bonds 593,4i6 .  23 

Interest  on  Bonds  and  Mortgages 703,409.91 

Interest  on  Deposits  in  Other  Banks 73,101 .01 

Rent  from  Other  Real  Estate 3,620. 17 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  6oi 

Debit  Credit 

Petty  Expenses 6,009  •  01 

Stationery  and  Postage 1,718. 19 

Advertising 3,420 .  90 

Fuel  and  Light 2,840 .  00 

Lunches 7,609 .31 

Telephone 2,109  •  62 

Repairs 1,894 .  84 

Funding  Committee 1,263  •  42 

Salaries 93,084.00 

Taxes 2,843 .33 

State  Banking  Department 2,167  •  ^9 

American  Bankers'  Association  Dues 7500 

Cash  Short  and  Over 71 .  20 

Franchise  Tax 76,940 .  04 


$112,407,904.86    $112,407,904.86 


There  is  also  accrued  interest  of  $410,000  on  stocks  and  bonds,  $655,643.18 
on  bonds  and  mortgages,  and  $18,000  on  deposits  in  other  banks.  A  dividend 
at  the  rate  of  4%,  amounting  to  $1,610,608.37  is  due  depositors.  In  accord- 
ance with  the  ofl5cial  valuation  list,  the  bank's  securities  at  this  time  are 
worth  $57,233,667  (Liberty  bonds  valued  at  par),  and  their  par  value  is 
seen  from  the  bank's  books  to  be  $52,809,000.  Amortization  on  bond 
premiums  is  $69,701.12;  on  bond  discounts  $4,819.81.  There  are  accrued 
taxes  of  $60,000. 

2.  $100,000  Richland  County  School  District  #3  Bonds,  3%,  interest 
payable  April  i  and  October  i,  are  bought  at  a  price  to  yield  4%.  The 
bonds  have  3  years  (six  interest  periods)  to  run.  Set  up  the  accounts  to 
show  cost,  interest,  and  amortization.    [1.02^=  1.12616242.] 

3.  Ulster  Township  5%  bonds,  interest  payable  June  15  and  December 
15,  are  bought  to  yield  6%.  Par  of  bonds  is  $30,000.  The  bonds  have  2 
years  (four  periods)  still  to  run.  Set  up  the  accounts  to  show  cost,  interest, 
and  amortization.  [1.03*=  1.12550881.] 


1.  From  the  trial  balance  of  December  31, 1920, on  pages  181  and  182  and 
the  journal  entries  for  the  month  of  January,  1921,  on  pages  182-192,  set  up 
general  ledger  accounts,  and  devise  a  form  of  subsidiary  record  in  which  to 
record  the  detail  of  general  ledger  revenue  and  expense  controlling  accounts 
given  in  the  entries;  p>ost  all  entries  showing  results  in  agreement  with  trial 
balance  as  of  January  31,  192 1,  and  cost  and  income  statements  for  January. 


6o2  APPENDIX 

2.  Prepare  balance  sheet,  arranged  according  to  good  practice,  from  trial 
balance  as  of  January  31,  192 1. 

It  should  be  noted  that  from  the  trial  balance  of  January  31,  1921,  detail 
of  assets,  liabilities,  and  reserves  of  collateral  operations  is  not  obtainable. 
In  practice  such  information  is  available  and  the  published  balance  sheet  is 
in  the  nature  of  a  consolidated  balance  sheet  of  all  departments  with  inter- 
company items  eliminated.  In  your  balance  sheet  show  such  items  as  are 
given  in  the  information  among  the  assets  under  the  headings  of  "Invest- 
ment in  Collateral  Operations"  and  "Accounts  Due  from  Collateral  Opera- 
tions." Assume  nothing  owing  to  collateral  operations  by  the  main  operating 
department. 

3.  Submit  comments  concerning  any  three  items  reflected  in  the  balance 
sheet. 

4.  From  information  shown  in  Entry  No.  11  (page  188)  and  in  trial 
balances,  determine  original  estimated  number  of  tons  of  recoverable  coal 
from  coal  lands  owned  in  fee. 

5.  Assuming  that  Account  i,  Development,  includes  development  costs 
on  both  owned  and  leased  lands,  that  no  attempt  was  made  to  separate  such 
costs  applicable  to  the  respective  lands,  and  that  as  of  January  i,  1921, 
it  was  estimated  that  1,000,000  tons  of  coal  in  leased  lands  and  all  of 
the  originally  estimated  recoverable  content  remaining  in  owned  lands 
would  be  recovered  through  such  development,  what  was  the  amount 
in  the  account  January  i,  192 1  ?  (No  cost  incurred  in  the  acquisition 
of  the  lease.) 

6.  What  were  the  net  investments  shown  by  the  books  in  Mine  Structures 
and  in  Mine  Equipment  accounts  as  of  December  31,  1920? 

VI 

1.  A  small  gold  mining  company  with  authorized  capital  stock  of  $100,000, 
divided  into  100,000  shares  of  $i  par  value  each,  fully  paid  and  non-assess- 
able, commences  operations  early  in  January,  1921.  The  company  takes 
over  by  negotiation  a  partially  developed  mining  property  and  its  equip- 
ment on  the  following  terms:  $90,000  for  the  property  itself  and  $10,000  for 
the  plant  and  equipment,  payable  in  shares  of  the  new  company  at  par,  the 
vendors  agreeing  to  donate  back  to  the  treasury  of  the  new  company  25,000 
of  the  shares. 

The  new  company  purchases  some  additional  nearby  claims,  increases  the 
plant  and  equipment,  and  at  once  begins  underground  development,  which 
results  later  in  the  year  in  a  body  of  commercially  profitable  ore  being 
opened.  Ore  shipments  to  the  smelters  begin  in  the  summer  and  continue 
the  balance  of  the  year.    Production  reaches  a  total  of  1,000  tons. 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  603 

On  May  i,  the  company  sells  a  block  of  its  treasury  stock  at  a  discount 
of  10%.  By  action  of  all  the  stockholders,  the  sale  agreement  stipulates  that 
the  purchasers  are  guaranteed  an  annual  return  of  at  least  7%  for  a  period 
of  two  years  from  the  date  of  purchase. 

In  October  the  company  leases  a  portion  of  its  underground  workings 
removed  from  the  place  of  its  principal  operations  upon  a  royalty  basis  of 
15%  of  the  net  smelter  returns. 

The  following  trial  balance  at  the  close  of  the  fiscal  year  is  taken  from 
the  books  at  the  general  ofiice  after  some  of  the  adjusting  entries  are  made: 

Trial  Balance  of  A  B  C  Mining  Company  at  December  31,  1921 

Debit  Credit 

Mining  Property $94,500.00 

Plant  and  Equipment: 

Boilers,  etc $5,500 .  80 

Power  Plant 6,61 7 .  70 

Blacksmith  and  Machine  Shop 1,000.80 

Hoisting  Engine 1,000.00 

Mine  Tools  and  Implements 980.90         15,100.20 

Construction  in  Progress. 1,811 .63 

Materials  and  Supplies i>s89 .  14 

Mined  Ore  on  Hand 300 .  00 

Bills  Receivable 449 .  50 

Accounts  Receivable 1,066 .  50 

Deferred  Charges: 

Mine  Development $5,985 .62 

Miscellaneous  Maintenance 211. 08 

General  Mine  Overhead  Expenses ..  .        2,411.17 

Organization  Expenses 345 .  20 

General  Office  Expenses: 

Administrative  Salaries 4,200.00 

Clerical  Salaries 1,850.00 

OflBce  Supplies  and  Expenses 635 .12 

Stationery  and  Printing 225 .80 

Employees'  Liability  Insurance 385.00 

Fire  Insurance 269 .  15 

Property  Taxes 189 .  38 

Interest  Allowed 38 .  30 

Traveling  Expenses 439 .  50         17,185 .32 

Suspense 160 .  oq 

Mine  Office  Cash 310.86 


6o4  APPENDIX 

Debit  Credit 

Banks: 

Caledonia  Trust  Company $6,118.37 

First  National  Bank 3,963 .  42      $  10,081 .  79 

Cash 126.25 

Pay  Checks $     2,411 .  25 

Vouchers  Payable 3>563 .  10 

Dividends 2,500 .  00 

Capital  Stock,  par 100,000.00 

Treasury  Stock,  par 20,000 .  00 

Surplus  from  Donated  Stock 24,500.00 

Operating  Expenses: 

Ore-Breaking $    8,495  60 

Transportation  Mine  to  Railroad. .. .  700.90 

Shipping  and  Selling 3,181 .45 

Deferred  Charges 1,500.00 

General  Mine  Overhead 2,250.00 

General  Ofl&ce  Expenses: 

Administrative  Salaries 2,200.00 

Clerical  Salaries 875 .00 

Employees'  Liability  Insurance 280.00 

Fire  Insurance 102 .  50 

Property  Taxes 180. 25 

Traveling  Expense 250 .  00         20,015  •  7° 

Income: 

Ore  Production,  gross $54,372. 29 

Rentals 306 .  75 

Interest  Earned 14  •  SO 

Miscellaneous  Income 29 .  00  S4>722 .  54 

$185,196.89     $185,196.89 

The  following  information  becomes  available  from  the  report  of  the  mine 
superintendent  received  soon  after  the  close  of  the  year. 

The  inventories  at  December  31,  after  allowing  for  depreciation,  are: 

Plant  and  Equipment: 

Boilers,  etc $5,050 .  10 

Power  Plant 5,955-93 

Blacksmith  Shop  and  Machine  Shop 850.68 

Hoist  and  Engine  Exjuipment 900 .  00 

Mine  Tools  and  Implements. 784. 72 

Materials  and  Supplies  in  Warehouse 1,550. 79 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  605 

Mined  Ore  on  Hand,  100  tons  of  an  assay  value  of  $45.50  per  ton.     Cost  of  breaking 

the  ore  down  and  handling  is  $3  per  ton. 
Ore  in  Transit  to  Smelters,  50  tons,  which  are  expected  to  net  $21.33  P^r  ton,  this 

estimate  being  based  on  an  assay  made  prior  to  its  shipment. 

On  December  28  the  leasers  have  shipped  to  the  Globe  Smelters  20  tons 
of  ore  of  an  estimated  net  value  of  $25  per  ton  after  allowing  for  treatment 
and  freight  charges.  This  shipment  is  not  settled  for  at  time  of  closing 
December  31. 

As  the  basis  for  the  depletion  charge,  the  mine  superintendent  estimates 
the  recoverable  ore  at  100,000  tons. 

Smelter  deductions,  covering  freight  and  charges,  as  shown  by  the  settle- 
ment sheets,  amount  to  $3,103.48. 

The  difference  between  the  physical  and  book  inventories  of  materials 
and  supplies  is  to  be  charged  to  Mine  Development. 

The  directors  meet  on  December  31,  and  declare  a  dividend  of  $2,500 
covering  the  disbursement  already  made.  They  order  that  a  reserve  of 
$4,000  be  set  aside  to  cover  taxes. 

From  the  above  information: 

(a)  Prepare  the  necessary  journal  entries  to  record  in  the  books  such 

data  as  are  not  shown  in  the  trial  balance  submitted,  including 
closing  entries. 

(b)  Prepare  balance  sheet  and  profit  and  loss  statement  to  show  the 

year's  operations. 

(c)  Submit  a  postclosing  trial  balance. 

2.  The  information  below  relating  to  mining  costs  is  taken  from  the 
mine  records  of  the  El  Doro  Mining  Company: 


6o6 


APPENDIX 


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6o8  APPENDIX 

Prepare  a  cost  sheet,  grouping  the  data  under  these  three  main  heads: 
Ore-Breaking,  Mine  Development,  and  General  Mine  Expenses.  Under  each 
one  of  these  main  heads  group  the  items  under  the  following  classes:  Labor; 
Supplies;  Explosives;  Repairs;  Light,  Heat,  and  Power;  Air;  Engineering 
and  Surveying;  and  Administrative  Expense.  Show  a  subtotal  for  each 
class. 

The  following  distributions  are  to  be  made: 

(a)  Power  Plant  Expenses: 

To  Ore-Breaking $    777.89 

Hoisting 3,170.04 

Pumping 7,657  57 

General  Mine  Expense 6,877.00    $18,482.50 


fb)  Sundry  Expenses: 

Expense  To  Ore-Breaking  To  Mine  Development 
Tramming                          75%  25% 

Hoisting  67  33 

Pumping  55  45 

The  ore  mined  during  the  year  amounts  to  475,000  tons. 

Drifts,  raisee,  cross-cuts  and  shafts  to  the  extent  of  3,944  feet,  have  been 

driven  during  the  year. 

On  the  cost  sheet  show  also  the  cost  per  ton  of  each  "class"  of  expense 

for  ore-breaking  and  general  mine  expenses,  and  the  cost  per  foot  of  each 

"class"  for  mine  development. 

VII 

The  following  trial  balance  is  taken  from  the  general  ledger  of  the  Meadow 
Grove  Land  and  Live  Stock  Company  for  the  year  ending  March  31,  1921: 

Alfalfa  Hay  (Inventory) $        575  00 

Accounts  Receivable 1,414.80 

Accounts  Payable $        225 .  18 

Allowance  for  Bad  Accounts  and  Notes 1 20 .  00 

Alfalfa  Hay  Sold 822 .46 

Alfalfa  Hay  Expense 1,250.00 

Beans  (Inventory  at  beginning) IS  85 

Breaking  Ground 966 .  14 

Bonds  (Due  January  i,  1925)  Authorized 50,000.00 

Bonds  Unissued 30,000 .  00 

Barns 3,562 .  80 

Cattle  Sheds 1,255 .  73 


IS.87I 

.64 

33 

.10 

I,023 

.09 

00,000 

.00 

PRACTICE  WORK  FOR  FIRST  HALF-YEAR  609 

Cattle  Corrals 41 7  70 

Clearing  Ground — 77450 

Cattle  (Inventory) 25,925 .00 

Chickens  (Inventory) 100.00 

Corn  (Inventory) 721 .  21 

Contract  for  Purchase  of  State  Land 3,100.00 

Cattle  Purchased 1,500.00 

Chickens  Purchased 15 .  60 

Cattle  Sold 

Chickens  Sold 

Corn  Sold 

Cash 895 . 97 

Cook 360 . 00 

Capital  Stock  Authorized 

Capital  Stock  Unissued 50,000 .  00 

Capital  Stock  Treasury 35,ooo .  00 

Chicken  Expense { 16 .  08 

Cattle  Expense 1,235.00 

Corn  Expense 937 . 00 

Coal 1 13 .  00 

Dehorning  Chute 179.00 

Depreciation  Accrued — Barns 309 .  25 

Depreciation  Accrued — Cattle  Sheds 89 .  70 

Depreciation  Accrued — Cattle  Corrals 83 .  16 

Depreciation  Accrued — Dehorning  Chutes 34  00 

Depreciation  Accrued — Flumes  and  Pipelines 1,168 .00 

Depreciation  Accrued — Garden  Equipment 14 .  00 

Depreciation  Accrued — Grain  Equipment 150.88 

Depreciation  Accrued — General  Equipment 34  60 

Depreciation  Accrued — Hay  Equipment 68 .  40 

Depreciation  Accrued — Horse  Equipment 130 .  45 

Depreciation  Accrued — House  Equipment 162 .  00 

Depreciation  Accrued— Houses 252 .02 

Depreciation  Accrued — Hog  Houses 15  00 

Depreciation  Accrued — Hay  Racks Si  •  19 

Depreciation  Accrued — Irrigating  Equipment 24  •  48 

Depreciation  Accrued — Poultry  Houses 18 .  86 

Depreciation  Accrued — Plow  and  Harrow  Equipment.  81 .  20 

Depreciation  Accrued — Telephone  Lines 34  •  80 

Depreciation  Accrued — Fences 280 .  00 

Eggs  Sold 52.91 

Fences 2,693.14 

Flumes  and  Pipelines 5,879 •  21 

Fence  Posts  (Inventory) 45  •  80 


5io  APPENDIX 

General  Equipment  Cost 183 . 1 1 

Garden  Produce  Sold 52 .  28 

Garden  Equipment  Cost 78 .  50 

Grain  Equipment  Cost     525 .  52 

Garden  Expense 43  •  70 

Groceries 636 .  71 

Houses 5,783.92 

Horse  Hire 15. 00 

Hog  Houses 75  •  00 

Hay  Racks 125 .  25 

Hay  Equipment  Cost 347-33 

Horse  Equipment  Cost 657 .00 

Hogs  (Inventory) 475 .  00 

House  Equipment  Cost 536 .  73 

Horses  Sold 165 .00 

Hog  Expense SiiS 

Horse  Expense 11 2 .  50 

Horses  Purchased 300 .  00 

Hogs  Sold 317. 90 

Horses  (Inventory) ; 1,805 .00 

Irrigation  Expense 525 .00 

Income  from  Breeding 159 .  95 

Insurance  Premiums 105 .  50 

Irrigating  Equipment 122 .44 

Interest  Received 80. 00 

Interest  Paid , 60 .  co 

Land 100,000.00 

Manager's  Salary 1,800.00 

Meat  Purchased 23 .  60 

Notes  Payable i  ,000 .  00 

Notes  Receivable 1,500.00 

Oats  (Inventory) 802 .  56 

Oats  Purchased 102 .  00 

Oats  Sold 1,207  •  10 

Oats  Expense 92 .  00 

Poultry  Houses 321 .62 

Profit  and  Loss ^»776 .  50 

Potatoes  (Inventory) 26 .  73 

Pumpkins 17.60 

Pasturage 105 .  00 

Plow  and  Harrow  Equipment  Cost 398.47 

Repairs — Flumes  and  Pipelines 48 .  00 

Repairs — Fences 82 .  20 

Repairs — Parts  for  Hay  Machinery  (Inventory) 24 .  90 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  6ii 

Repairs — Cattle  Sheds 5 .  50 

Repairs — Barns 6 .  00 

Repairs — Hay  Machinery 48 .  75 

Repairs — Grain  Equipment 18 .42 

Repairs — Plows  and  Harrows 31 .  20 

Surplus  beginning  of  year 7,361 .  63 

Seeding  to  Perennial  Crops 631 .87 

Sheep  Sheds 15. 00 

Straw  Expense 2 .  50 

Surplus  Adjustments 79  •  82 

Sacks 573  ■  00 

Straw  (Inventory  beginning  of  year) 10 .  00 

Turnips  (Inventory  beginning  of  year) 19  •  70 

Telephone  Lines 1,162 .  40 

Wild  Hay  (Inventory  beginning  of  year) 200 .  00 

Wild  Hay  Expense 50 .  00 

$286,490.73    $286,490.73 

Additional  data  available  and  to  be  taken  into  consideration  at  the  end 
of  the  fiscal  year  are: 

I.  The  consumption  record  shows  the  following;  the  prices  are  the  average 
market  prices: 
Cattle: 

5  head  butchered at  $70.00  per  head 

Hogs: 

12  head  butchered "  25 .00    "       * 

Chickens  and  Eggs : 

50  head  eaten "  i  .00    "      * 

150  doz.  eggs  used "  .50    "    doz. 

Oats: 

500  cwt.  fed  to  horses "  2 .  00    "    cwt. 

5    "      «      «  chickens "  2.00    «       " 

Com: 

50  cwt.  fed  to  horses "  i .  20    "       " 

1,000    "      "      «  cattle «  1 .  20    «      « 

3    «      "      "  chickens «  1 .  20    «      « 

20    «      «      «  hogs «  1.20    «      « 

Alfalfa  Hay: 

15  tons  fed  to  horses "  15  •  00    "    ton 

700    "      «    «  cattle «  IS  .00    "     " 

Wild  Hay: 

14  tons  fed  to  horses "  20 .00    "      " 

25    «      «    "  cattle "  20.00   «     « 


6i2  APPENDIX 

Straw: 

25  tons  fed  to  cattle at  $2 .00  per  head 

It  costs  10%  of  the  market  value  to  market  the  above  products. 

2.  The  following  discrepancies  are  found  in  the  amount  of  produce  ac- 

counted for: 

Oats  unaccounted  for 32  cwt. 

Corn  unaccounted  for , 56    " 

Wild  Hay  unaccounted  for 2  tons 

Alfalfa  Hay  overaccounted  for 12    " 

3.  Closing  inventories  are  as  follows: 

Cattle 550  head $45,800 .  00 

Hogs 18     "    450.00 

Horses 17     "    1,950.00 

Potatoes 19 . 1  cwt.  at  $  2 .  00 38 .  20 

Oats 700    "      "       1.50 1,050.00 

Corn 3,000    "      "       1. 00 3,000.00 

Alfalfa  Hay. .     100  tons  "     12.00 1,200.00 

Groceries 28 .  56 

Coal 16.00 

Fence  Posts 21 .  70 

Repair  Parts  for  Hay  Machinery 17-23 

Sacks 122. 00 

Fence  posts  have  all  been  charged  to  Repairs — Fences,  and  repair  parts  for  nay 
machinery  have  been  chfirged  to  Repairs — Hay  Equipment. 

4.  Horse  manure  was  used  as  fertilizer  as  follows: 

Garden 4  tons 

Oats 35     " 

Com 50    " 

Cattle  manure  was  used  as  fertilizer  as  follows: 

Garden 2  tons 

Oats 75     " 

Corn 90    " 

(Figure  the  above  at  $1  per  ton.) 

5.  The  income  from  breeding  is  analyzed  as  follows: 

Horses $44.95 

Cattle 95 .00 

Hogs 20.00 

6.  All  sacks  were  used  for  oats. 

7.  The  labor  record  shows  the  following  summary: 

Man-Days     Horse-Days 

Repairing  Fences 6  8 

Repairing  Houses 3  l 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  613 


Repairing  Barns 

Repairing  Cattle  Sheds 

Building  Sheep  Sheds 

Repairing  Flumes  and  Pipelines . 

Repairing  Hay  Equipment 

Cattle 

Hogs 

Horses 

Garden 

Oats 

Com 

Alfalfa  Hay 

Wild  Hay 

Straw 

Groceries 

Coal 

Butchering  Cattle 

Butchering  Hogs 

Irrigating 


[an-days 

Horse-days 

2 

I 

2 

0 

S 

I 

16 

8 

4 

0 

401 

602 

17 

2 

127 

54 

46 

32 

223 

503 

283 

460 

418 

703 

18 

30 

I 

I 

9 

18 

6 

13 

10 

lO 

12 

12 

191 

105 

1,800  2,563 


(See  Instructions  Nos.  5  and  6  below.) 

8.  Cost  of  board  per  man-day  was  50  cents  the  preceding  year. 
Q.  Depreciation  is  estimated  at  following  rates,  based  upon  cost  per  trial 
balance: 

Houses  (dwellings)  and  Telephone  Lines 4% 

Barns 5 

Corrals 15 

Dehorning  Chutes 20 

Hay  Racks 30 

All  other  assets 10 

10.  The  acreage  record  shows  the  following: 

Acres 

Oats 150 

Com 180 

Alfalfa  (all  sowed  in  previous  years) 200 

Garden 2 

Total  in  cultivation 532 

Wild  Hay 40 

Pasture , , ; 1,338 

Waste 50 


6i4  APPENDIX 

Acres 

Irrigation  System 30 

Building  Sites  and  Roads 10 

Total 2,000 

11.  The  cost  of  irrigation  for  the  preceding  year  was  $2  per  acre. 

12.  The  following  expenditures  have  been  made  on  behalf  of  next  year's  crops: 

Garden $15 .  30 

Corn 87.00 

13.  Hay  was  harvested  as  follows: 

Alfalfa 826  tons 

Wild  Hay 31     « 

14.  Grain  was  harvested  as  follows: 

Oats I  ^422     cwt. 

Corn 4.595-2     " 

15.  All  cultivated  crops  were  irrigated. 

16.  $50  of  the  insurance  premiums  was  unexpired. 

17.  The  repairs  to  flumes  and  pipelines  represent  the  cost  of  installing  a 

small  siphon  at  a  certain  point  on  the  irrigating  canal,  where  a  new 
line  of  the  Union  Pacific  Railroad  has  crossed.  The  railroad  company 
is  to  pay  for  any  expenses  incurred. 

18.  Repairs  to  barns  represent  repairs  of  a  section  of  the  barns  used  exclu- 

sively for  cattle. 

19.  Accrued  taxes  are  estimated  as  follows: 

General $1,265.00 

Federal 6,735 .00 

20.  An  analysis  of  the  balance  of  $1,776.50  to  the  credit  of  the  Profit  and 

Loss  account  in  the  trial  balance  shows  it  to  be  made  up  of  the 

following: 

Profit  on  sale  of  a  house  in  the  city $1,850.00 

Expenses  on  the  city  property 73  •  50 

Net  profit $1,776 .  50 

2 1 .  Inventoriesat  the  beginning  of  the  year  represented  quantities  as  follows: 

Corn 480. 8  cwt. 

Oats 422.0     " 

Alfalfa  Hay 38.0  tons 

Wild  Hay 10. o     « 

Cattle 432 . o  head 

Hogs 28.0     « 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  61$ 

22.  Quantities  of  produce  and  live  stock  sold  were  as  follows; 

Corn 947  cwt. 

Oats 671     " 

Alfalfa  Hay 61  tons 

Cattle 167  head 

Hogs 9     " 

23.  Quantities  of  produce  and  live  stock  purchased  were  as  follows: 

Oats 64  cwt. 

Cattle 22  head 

24.  Live  stock  lost  from  death: 

Cattle 13  head 

Hogs 2     " 

25.  An  average  of  30  head  of  live  stock  was  pastured  for  others. 

26.  There  were  12  work  horses  at  the  end  of  the  year,  including  draft  and 

saddle  horses,  and  there  were  no  changes  in  numbers  of  horses  during 
the  year.  They  were  used  as  follows: 

1920  No.  of  Days     No.HorsesUsed 

April 2  None 

3  S 

13  8 

8  9 

5  " 
May I                      None 

2  X 

2.2 

6  6 
10  9 

S  10 

4  II 

1  12 
June 4  2 

2  3 
16 

10  7 

I   .    .    8 

12  10 

July 3  3 

5  4 

9  5 

14  8 


6i6  APPENDIX 

1920  No.  of  Days     No.  Horses  Used 

August I  None 

4  4 
2  7 

2  9 

23  10 

September 4  a 

14  8 

7  9 

5  10 
October i  None 

3  I 

8  5 

6  6 

5  7 

8  9 
November 2  3 

4  6 

11  7 
3  8 

10  10 

December ,..,,.,.-        i.  None 

2  I 

2  3 

7  4 

7  7 

12  10 
1921 

January 1  None 

3  I 

6  3 

9  4 
3  6 

8  9 
February ,          3  i 

6  3 
10  7 

8  9 

March 2  None 

3  3 

5     ■  7 

7  9 

4  10 
10  II 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  617 

27.   An  analysis  of  corn  expense  as  shown  in  the  trial  balance  shows  the 
following: 

Seed $  50.00 

Labor 800.00 

Expenses  on  next  year's  crop -. 87 .  00 


Total  Trial  Balance $937 


00 


(a)  Write  the  adjusting  and  closing  journal  entries,  being  careful  to 
allocate  properly  to  the  several  farm  operations  all  expenses  that  can  be  so 
distributed.   Follow  the  order  of  the  entries  shown  in  the  text. 

(b)  Make  up  the  following  statements  and  schedules,  in  accordance 
with  the  forms  shown  in  the  text: 

1.  Balance  sheet 

2.  Profit  and  loss  statement 

3.  Analysis  of  produce  accounts 

4.  Analysis  of  live  stock  accounts 

5.  Comparative  statistics.     (Make  entries  for  year  ended  March  31, 

192 1  only.) 

6.  Analysis  of  cost  of  production. 

7.  Analysis  of  horse-days  worked.    (Show  cost  of  keeping  horses  not 

worked,  for  the  year  only,  not  by  months.) 

Instructions 

1.  Charge  cattle  consumed  to  Beef  Butchered;  hogs  to  Hogs  Butchered, 

and  chickens  and  eggs  to  Poultry  and  Eggs. 

2.  In  determining  ratios,  drop  fractions  of  less  than  >^%,  and  add  1%  for 

fractions  of  ^2  or  more  than  yi. 

3.  Distribute  depreciation  hay  racks  and  corrals:  cattle,  80%,  horses, ,  20%. 

4.  Charge  interest  on  investment  at  rate  of  8%.    In  the  absence  of  the 

balance  sheet  at  the  beginning  of  the  year  (see  explanation  under 

entry  18,  page  257),  use  as  a  basis  the  book  values  shown  in  the  pre- 

closing  trial  balance. 
Distribute  interest  on  pasturage  and  on  the  hay  racks  to  the  different 

classes  of  live  stock  in  proportion  to  number  of  head  per  closing 

inventory. 
Charge  interest  on  grain  equipment  to  General  Grain  Expense. 
Charge  interest  on  clearing  and  breaking  ground  to  cultivated  crop  in 

proportion  to  acreage. 
Charge  interest  on  plowing  and  harrowing  equipment  and  on  irrigating 


6l8  APPENDIX 

assets,  to  Plowing  and  Harrowing  Expense  and  Irrigation  Expense. 

Charge  interest  on  all  assets  used  directly  in  connection  with  the  several 
farm  operations  to  those  respective  expense  accounts,  e.g.,  Cattle, 
Oats,  Garden,  etc. 

Charge  all  other  interest  to  General  Farm  Expense. 

In  order  to  charge  interest  on  the  entire  investment,  the  sum  of  the 
assets  on  which  interest  has  already  been  figured  should  be  deducted 
from  the  total  assets  employed  in  the  business  and  interest  on  the 
difference  charged  to  General  Farm  Expense.  In  the  absence  of  the 
balance  sheet,  arbitrarily  assume  the  difference  to  be  $s,ooo  at  the 
beginning  of  the  year. 

5.  In  distributing  horse  expense  (see  journal  entry  20,  page  258),  the 

number  of  horse-days  devoted  to  horses  should  be  deducted  from  the 
total,  since  Horse  Expense  account  will  be  closed  by  this  entry  and  the 
deduction  of  this  item  from  the  total  will  have  the  effect  of  charging 
it  ratably  to  other  activities  in  which  horses  were  used.  In  order 
to  simplify  the  calculation,  distribute  horse  expense  as  if  it  were  even 
$2,905.00.     Adjust  difference  of  24^'  arbitrarily  in  cattle  expense. 

6.  In  distributing  house  expenses  (see  journal  entry  25,  page  259),  the 

number  of  man-days  devoted  to  horses  should  be  deducted  from  the 
total,  since  Horse  Expense  account  has  been  closed.  (See  journal 
entry  20.)  The  number  of  man-days  devoted  to  repairing  houses, 
butchering  cattle,  butchering  hogs,  and  to  garden,  groceries,  and  coal, 
should  also  be  deducted  from  the  total,  since  these  accounts  have  been 
closed.  (See  journal  entry  24,  page  259.)  The  deduction  of  these 
items  will  have  the  effect  of  charging  them  ratably  to  other  activities 
in  which  labor  was  used. 

7.  For  simplicity  in  figuring,  use  $1.71  per  man-hour  in  journal  entry  25, 

adjusting  the  difference  in  Irrigation  Expense  account. 

8.  In  making  journal  entry  28,  page  260,  omit  Garden  Expense,  since  this 

account  has  been  closed. 

vm 

1.  The  following  trial  balance  is  taken  from  the  books  of  the  New  York 
Malleable  Iron  Company  as  of  December  31,  19 — : 

Land  and  Buildings $  223,288.83 

Machinery 129,651.65 

Furnaces  and  Ovens 41,043 .41 

Patterns 8,189.77 

Flasks 3.938. 7» 

Plant  Equipment 19,306.45 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR 


619 


Office  Equipment 6,192 .  22 

Additions  and  Betterments 1,410.42 

Cash  in  Bank 43,368 .38 

Cashier's  Working  Fund 800 .  00 

Accounts  Receivable 279,622 .  54 

Notes  Receivable i}973  •  79 

Malleables  on  Hand  and  in  Process,  Inventory 

Dec.  31,  19 — 44,600.50 

Investments 50,000.00 

Supplies   Unused  in  Plant,   Inventory    Dec.   31, 

19 — 4,001 .  12 

Stores  General 64,788 .  93 

Stores  Metals 68,788 .  53 

Annealing  Pots  and  Bottoms 11,489 .32 

Grate  Bars  and  Miscellaneous 6,959 .49 

Fuel 37,693.02 

Sand,  Brick,  Clay 11,961 .02 

Metal  Used 27,088 .  10 

Melting 108,352.33 

Molding 118,918.07 

Cores 30,564 .  68 

Hard  Iron  Cleaning  and  Trinuning 151651 .  22 

Annealing 29,920 .  85 

Soft  Iron  Cleaning 5,317.40 

Fitting,  Assembling,  and  Shipping 12,048 .  58 

Special  Pattern  and  Flask  Expense 800 .  74 

Repairs  and  Maintenance 7,263 .  72 

Miscellaneous  Shop  Expense 12,225 .33 

Returned  Malleables 6,097  •  26 

Freight  on  Returned  Malleables 419 .38 

Salaries  cf  Salesmen 13,653 .  84 

Selling  Expense 1,01 1 .  74 

Stationery,  Printing,  Advertising i,i3S  •  27 

Interest  and  Exchange 1,312 .  17 

Telephone  and  Telegraph 359 .  28 

Insurance,  Taxes,  etc 7,723.00 

Income  Tax 18,000.00 

Miscellaneous  Office  Expense 11,968 .  54 

Legal  Expense 1,018 .  78 

Fire  Loss 5,652.00 

Capital  Stock 

Surplus 

Reserve  for  Depreciation 

Reserve  Income  Tax  and  Contingencies 


300,000 .  00 

331,453-43 

91,915  57 

21,363-94 


620  APPENDIX 

Reserve  Doubtful  Accounts 8,841 .67 

Vouchers  Payable 26,450. 66 

Notes  Payable 20,000 .  00 

Unclaimed  Wages 478 .  62 

Merchandise  Sales,  Malleables. , 681,628.86 

Interest  and  Exchange 2,293  •  72 

Miscellaneous  Earnings 746 .  60 

Prior  Year's  Expense 483  .07 

Purchase  Discount 1,289  •  9^ 

Royalties  Received 8,624. 27 


$1,495,570  39     ti.495>570  39 

In  closing  the  books  for  the  year,  the  following  items  are  to  be  taken  into 
consideration : 

Inventory  of  Stores $57,721 .51 

Inventory  of  Metals 67,716.41 

Inventory  of  Unused  Supplies  charged  to  departments  from  stores 

ledger 4,551 .  57 

Malleables  finished  and  in  process , 41,578.88 

Plant  Equipment  Charged  off 3,6i  2 .  65 

Depreciation 23,877 .  43 

Special  Reserves: 

Income  Tax  and  Contingencies 24,000 .  00 

Adjustment  Inventory  Values 4,085 .32 

Accrued  Items: 

Interest  Accrued  (Income) 2,437  •  34 

Royalties  Earned,  Unpaid 3,820.  lo 

Bad  Debts'  estimate 3,296 .  23 

Pay-RoU  Accrued 21,797  •  ^S 

Distributed  as  follows: 

Annealing  Pots  and  Bottoms $     610 .  30 

Grate  Bars,  etc 55  00 

Melting 1,126.05 

Molding 10,609.43 

Cores 1,583.80 

Hard  Iron  Trimming i,54o .  20 

Annealing i,930 .  39 

Soft  Iron  Cleaning 1,681 .  90 

Shipping •••••• 903  •  71 

Special  Pattern  and  Flask  Expense 568 .  92 

Repairs  and  Maintenance 161 .97 


PRACTICE  WORK  FOR  FIRST  H.\LF-YEAR  621 

General  Shop  Expense 894 . 1 7 

Additions  and  Betterments 132  .oi 

Draw  up  a  pro-forma  balance  sheet  and  statement  of  profit  and  loss. 

2.  The  classification  below  of  requisitions,  expenses,  pay-roll,  etc.,  has 
been  prepared  from  the  cost  records  for  the  summary  of  monthly  estimated 
costs  of  making  malleable  iron  castings.  From  this  information  prepare  an 
itemized  pro-forma  monthly  estimated  cost  statement  showing  the  "cost 
per  100  lbs.  of  good  castings  made"  for  each  general  division. 

1.  Stores  requisitions  classified: 

Supplies  and  tools  issued  during  month: 

Melting  Department $   478.62 

Molding  Department 1,146.06 

Core  Department 160. 74 

Hard  Iron  Cleaning 5. 11 

Hard  Iron  Trimming 5.67 

Annealing  Department 328.09 

Soft  Iron  Cleaning 10.40 

Fitting  and  Assembling 14.08 

Shipping 1487     $2,163.64 

Fuel  issued  during  month: 

Melting  Department $3,682 .  84 

i                     Core                 "          272.83 

Annealing        "          i,S9i  52     $5,547-19 

Sand,  brick,  and  clay  issued  during  month: 

I  Melting  Department $448 .  54 

Molding  "  523  30 

Core  "  74.7s 

Annealing        "  448-54     $i,49S-i3         • 

Metals  issued  to  melting  department: 

Pig  Iron .■,••.•.•. $15,240.92 

Steel  Scrap 884.80 

Malleable  Scrap 1,562.13    $17,687.85 

Annealing  pots  and  bottoms  issued $  2,512.45 

2.  Pay-roll  distribution,  direct  and  indirect  labor: 

Melting  Department $   3,119.94 

Molding  "  19,054.88 


62  2  APPENDIX 

Core  Department 4,857.82 

Hard  Iron  Cleaning 967 .  29 

Hard  Iron  Trimming 1,170.86 

Annealing 2,654.56 

Soft  Iron  Cleaning 406 .  76 

Fitting  and  Assembling 785 .  83 

Shipping 1,387 .00   $34,404.94 


Repairs  and  Mamtenance  1  , .  .,  .  ,  .  ,  ,  » 
r,  ,  „i_  T-  >  (details  with  special  class) 
General  Shop  Expense      J 

3.  Repairs  and  maintenance — labor  and  materials  used: 

Melting  Department $541 .  50 

Molding          "          541 .51 

Core                 "          54- IS 

Hard  Iron  Cleaning 34  60 

Hard  Iron  Trimming 38.40 

Annealing 487. 35 

Soft  Iron  Cleaning 54-  iS 

Shipping 36 .  10 

Fitting  and  Assembling 36 .  10     $1,823 .86 


4.  General  shop  expense — labor  and  materials  used: 

Melting  Department $188.51 

Molding          "          348. 74 

Core                 "          75.40 

Hard  Iron  Cleaning 17  •  87 

Hard  Iron  Trimming 19-83 

Annealing 188 .51 

Soft  Iron  Cleaning 47  ■  12 

Fitting  and  Assembling 18 .  85 

Shipping 18.85        $923.68 


Insurance  and  taxes  (1/12  of  annual  charge) — distributed  pro  rata  as 
agreed  over  the  departments: 

Melting  Department $170. 15 

Molding           "          437-54 

Core                 "          8s  .07 

Hard  Iron  Cleaning 46.09 

Hard  Iron  Trimming S^  -34 

Annealing  Department 243 .07 

Soft  Iron  Cleaning 72 .92 

Fitting  and  Assembling 48 .  61 

Shipping  Department 69.77     $1,224.56 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  623 

6.  Depreciation  (1/12  of  estimated  annual  charge) — distributed  as  agreed 

pro  rata  over  the  departments: 

Melting  Department $334. 29 

Molding          "          859.84 

Core                 "          167 .  14 

Hard  Iron  Cleaning 90. 15 

Hard  Iron  Trimming 100.67 

Annealing  Department 477 .  55 

Soft  Iron  Cleaning 143 .  26 

Fitting  and  Assembling 95  •  Si 

Shipping  Department 1 19  •  39     $2,387 .  80 

7.  Special  pattern  and  flask  expense  (1/12  of  estimated  annual  cost  above 

income  from  sales  of  patterns)  $150. 

8.  Income  tax  provision  (1/12  of  estimated  annual  amount  payable  for 

income  tax)  $3,000. 

9.  Expense  accounts  for  month: 

Salaries $2,706 .  73 

Selling  Expenses 426.47 

Stationery,  Printing,  Advertising 141-91 

Telephone  and  Telegraph 44  91 

Legal  Expense 127 .35 

Sundry  OflSce  Expense 196 .07     $3,643 .44 


10.  Inventory: 

Estimated  malleables  finished  and  in  process: 

Beginning  of  month — 130  tons  estimated  average  price  $93.00 
End  of  the  month    — 1 20    "  "  "  "       95 .  00 

Additional  information: 

Good  finished  castings  produced  during  month 640  tons 

Merchandise  sales  malleables $107,979  •  95 

Malleables  returned  during  month — defective  and  otherwise 
— 4.76  tons $762 .  15 

In  grouping  these  items  under  their  respective  departments,  the  hard 
iron  cleaning  department  may  be  separated  from  or  grouped  with  the  hard 
iron  trimming  and  sorting  department,  at  the  option  of  the  student.  The 
fitting  and  assembling  and  shipping  departments  are  to  be  handled  similarly. 

3.  You  are  required  to  furnish  estimated  costs  of  making  malleable  iron 
castings  from  the  following  customers'  patterns,  as  given  below,  submitted 
on  inquiries  received  today. 


624  APPENDIX 

(a)  Pattern  #i,  machine   molding;    2,000   pieces   required;   weight 

3>^  lbs.  each;  4  pieces  on  a  gate;  weight  of  gate  11  lbs.;  molding 
direct  labor  10  cents  per  mold;  loss  bad  castings  10%;  no  cores. 

(b)  Pattern  #2,  machine  molding,  hydraulic  test;  4,000  pieces;  weight 

8.8  lbs.  each;  2  pieces  on  a  gate;  weight  of  gate  11  lbs.;  molding 
direct  labor  6}4  cents  per  mold;  loss  bad  castings  25%;  one  core 
each  mold;  core-making  direct  labor,  3  cents  per  mold. 

(c)  Pattern  ^3,  machine  molding;  1,000  pieces  required;  weight  40 lbs. 

each;  one  on  a  gate;  weight  of  gate  10  lbs.;  molding  direct  labor 
22  cents  each;  loss  bad  castings  3%;  no  cores. 

(d)  Pattern  #4,  bench  molding;   10,000  pieces  required;  weight  2.5 

ounces  each;  24  pieces  on  a  gate;  weight  of  gate  3  lbs.;  molding 
direct  labor  7  cents  per  mold;  loss  bad  castings  20%;  special 
finishing  charge  for  straightening,  $1.50  per  hundred  pounds. 

(e)  Pattern  #5,  bench  molding;  2,000  pieces  required;  weight  8  ounces 

each;  14  pieces  on  a  gate;  weight  of  gate  6  lbs.;  molding  direct 
labor  10  cents  per  mold;  loss  bad  castings  35%;  special  finishing 
charge  for  grinding  fins,  25  cents  per  hundred  pieces;  one  core 
each  piece;  core-making  direct  labor  i  cent  each  core. 

Forms  3  and  4  of  the  text  are  to  be  used  as  models. 
The  following  general  information  is  available: 

Metal  cost  is  to  be  taken  as  the  average  cost  obtained  in  Problem  2. 

Average  melting  loss  for  the  foundry  is  10%. 

Cost  of  melting  per  ton  is  to  be  taken  from  Problem  2. 

Loss  in  bad  castings,  as  given  above,  was  estimated  from  class  costs 

for  each  pattern. 
Molding  and  core  direct  labor  charge  is  given  above  for  each  pattern. 
Overhead  for  molding  and  cores,  or  ratio  of  other  departmental  costs 

to  direct  labor  cost,  is  120%  for  molding  and  110%  for  cores. 
All  other  expenses  per  ton  of  good  castings  produced  are  to  be  taken 

from  Problem  2. 
Additional  finishing  expense  for  straightening,  grinding  fins,  etc.,  as 

given  above  was  estimated  for  each  pattern  submitted. 

IX 

A  trial  balance  taken  from  the  general  ledger  of  the  New  Penn  Construc- 
tion Company,  covering  a  period  of  11  months  ending  November  30,  19 — , 
shows  the  following  items: 

Cash  in  Banks $      30,425 .96 

Petty  Cash  Fund 1,100.00 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  625 

Deposits  on  Water-Meters,  Permits,  etc 150- SO 

Notes  Receivable 8,500 .  00 

Accounts  Receivable 96,782 .  71 

Contract  Cost  Ledger 251,416 .  53 

Building  Materiab  (Inventory) 8,792 .  20 

Securities  Owned 11,200.00 

Real  Estate 45,000.00 

Plant  and  Equipment 27,500.00 

Furniture  and  Fixtures 1,325 .00 

Notes  Payable $  SS,ooo .  00 

Accounts  Payable , 47,477  ■  55 

Amount  Requisitioned 190,550.00 

Reserve  for  Depreciation 12,450.00 

Reserve  for  Doubtful  Accounts 4>o93  •  88 

Capital  Stock 100,000 .  00 

Surplus 35,678 .81 

Reserve  for  Anticipated  Losses 8,000 .  00 

Contract  Sales 729,697 .  82 

Cost  of  Contracts 638,726.69 

Discounts  Received 1,070. 29 

Dividends  Received 672.00 

New  Business  Department  Expense 7,300.00 

Estimating  Department  Expense 6,078.00 

Purchasing  Department  Expense 5, 300 .  00 

Yard  Expense i,4S6 . 00 

Stationery  and  Supplies 1,276 .  80 

Telephone  and  Telegraph ". . . .  728 .  50 

Ofl&cers'  Salaries 15,000.00 

Office  Salaries 4,550.00 

General  Expense 8,250.00 

Taxes 6,822 .  76 

Rent 3,000.00 

Insurance 338 .  70 

Interest  on  Notes  Payable 3,670.00 


$1,184,690.35    $1,184,690.35 

The  summarized  transactions  for  the  month  of  December  comprise: 
Charges  to  the  contract  cost  ledger  covering  purchases  of  materials,  pay- 
rolls, etc.,  amount  to  $57,892.20.  These  are  distributed  as  follows: 
$8,400  to  excavation,  $9,500  to  foundation,  $15,000  to  steel  construction, 
$10,992.20  to  mason  work,  $5,000  to  carpenter  work,  $5,000  to  plumbing 
and  heating,  and  $4,000  to  decorating  and  painting.   Included  in  this  item 


626  APPENDIX 

of  $57,892.20  are  $12,175.30  representing  requisitions  by  subcontractors 
against  the  company. 

Transfers  of  building  materials  to  the  yard  and  warehouse,  previously 
charged  to  jobs,  are  $4,275. 

Purchases  of  equipment  amount  to  $3,200, 

The  amount  requisitioned  by  the  company  against  owners  is  $68,271.25. 

Construction  work  completed  amounts  to  $25,475.30  at  sales  valuation 
and  $18,625.60  at  cost  valuation. 

General  office  expenses  are  distributed  as  follows: 

New  Business $  650.00        General  Expense^ $  675.00 

Estimating 500.00         Rent 275.00 

Purchasing 450.00         Stationery 100.00 

Yard  Expense 150.00        Telephone  and  Telegraph 75  00 

Officers'  Salaries 1,600.00        Bonus  to  Officers 3,000.00 

Office  Salaries 400.00  Bonus  to  Office  Employees.. .     300.00 

Repairs  on  work  completed  last  year,  with  a  two-year  guaranty,  amount 
to  $1,000. 

Several  workmen  were  injured  on  a  job,  the  cost  of  which,  amounting 
to  $200,  is  covered  by  insurance. 

Cash  receipts  are : 

Accounts  Receivable $118,053.96 

Sales  of  Building  Materials.      1,200.00 
Cash  disbursements  are: 

Accounts  Payable $75,000.00  gross,  from  which  a  discount 

of  $260  was  allowed. 
Notes  Payable 35,000.00 

During  the  current  month  the  contract  for  which  the  reserve  for  antici- 
pated losses  had  been  provided  was  completed  at  an  actual  profit  of  $2,000. 
The  amount  of  this  contract  is  included  in  the  amount  of  construction  work 
completed,  given  above  as  $25,475.30. 

A  bid  for  $150,000  is  submitted  on  a  fire  house  for  the  city,  accompanying 
which  is  the  company's  certified  check  for  5%  as  a  guaranty  of  good  faith. 

Included  in  the  amounts  requisitioned  is  an  amount  of  $27,500,  which 
represents  requisitions  on  10%  cost-plus  contracts,  it  being  the  practice  to 
include  the  10%  in  the  amount  requisitioned  and  to  transfer  this  imme- 
diately to  Contract  Sales. 

The  accrued  depreciation  on  plant  and  equipment  chargeable  to  con- 
struction work  in  progress  at  the  end  of  the  year  amounts  to  $2,000.  Depre- 
ciation to  be  charged  for  idle  time  of  equipment  amounts  to  $250.  Deprecia- 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  627 

tion  on  furniture  and  fixtures  amounts  to  $132.50.  Depreciation  of  real 
estate  at  3%  is  to  be  taken  into  account.  Set  aside  1%  of  outstanding 
notes  and  accounts  receivable  as  a  reserve  for  doubtful  accounts. 

Accrued  interest  on  notes  receivable  is  $278. 

Prepaid  interest  on  notes  payable  is  $315. 

Unexpired  insurance  is  $136. 

Accrued  ofiice  salaries  are  $175. 

Accrued  wages  chargeable  to  jobs  are  $362. 

Inventory  of  stationery  and  supplies  is  $300. 

Inventory  of  building  materials  is  $12,567.20. 

Set  aside  a  reserve  for  federal  taxes  of  $5,200. 

Take  a  trial  balance  for  the  year  ending  December  31,  19 — . 

Draw  up  a  pro-forma  balance  sheet  and  statement  of  profit  and  loss. 

X 

The  following  trial  balance  as  of  December  31,  19 — ,  is  taken  from  the 
general  ledger  of  a  company  dealing  in  green  and  roasted  coffee,  teas,  spices, 
and  extracts.  The  company  also  deals  in  coffee  futures,  both  on  its  own 
account  and  for  clients,  and  through  its  roasting  plant  does  roasting  for  the 
trade. 

Cash $      9,820.00 

Notes  Receivable 4,270.00 

Trade  Accounts  Receivable 125,116.50 

Reserve  for  Doubtful  Accounts $       10,619.84 

Roasted  Coffee  Inventory 80,000.00 

Green  Coffee  Inventory 296,000 .  00 

Tea 32,000.00 

Spices  and  Extracts 11,950. 00 

Liberty  Bonds 30,000 .  00 

Miscellaneous  Investments 4S,ooo .  00 

Deferred  Charges  to  Operation 2,800 .  00 

Plant  and  Equipment 360,124.96 

Depreciation  Reserve  Plant  and  Equipment 27,900.00 

Trade-Marks,  Brands,  etc i  .00 

Margins  with  Brokers 8,750.00 

Deposit  with  New  York  Coffee  &  Sugar  Clearing 

Association 15,000 .  00 

Exchange  Membership 9,000 .  00 

Notes  Payable 74,000.00 

Accounts  Payable 127,260.79 

Customers  Margin  Ledger 15,750. 74 

Contract  Differences 1,375 .  29 


628 


APPENDIX 


Mortgage  Payable 115,000.00 

Capital  Stock — Common 300,000.00 

Surplus 47,148  •  10 

Dividends 20,000 .  00 

Roasted  CofiFee — Sales 675,130.42 

Roasted  Coffee — Sales  Returns  and  Allowances. . .  18,250.00 

Green  Coffee  Sales 703,728.98 

Green  Coffee  Sales  Returns  and  Allowances 28,657.96 

Tea  Sales S7>303  o* 

Tea  Sales  Returns  and  Allowances 1,500.00 

Spices  and  Extracts  Sales 64,408 .  74 

Spices  and  Extracts  Sales  Returns  and  Allowances.  1,000.00 

Green  Coffee  Purchases 763,153 .00 

Green  Coffee  Purchases  Returns  and  Allowances.. .  6,197.51 

Trade  Roasting  Income 5,732 . 60 

Inward  Freight  and  Cartage 26,740.00 

Brokerage,  Insurance,  and,  Storage 3,440.00 

Miscellaneous  Purchasing  Expenses 7,320.00 

Tea  Purchases 65,225 .00 

Tea  Purchases  Returns  and  Allowances 200.00 

Spices  and  Extracts  Purchases 62,800.00 

Spices  and  Extracts  Purchases  Returns  and  Al- 
lowances   150.00 

Superintendence   Roasting  and  Packing   Depart- 
ment   1,708.92 

Labor 1,690. 23 

Power 584 .  00 

Light  and  Heat 1,919  ■  90 

Fuel,  Roasting 730 .  00 

Repairs  and  Maintenance 8,300. 85 

Building  Expense 225 .00 

Insurance 1,847 .08 

Sundry  Roasting  Exp)ense 182 .  50 

Containers  and  Supplies 1,023 .63 

Salesmen's  Salaries  and  Commissions 47,30i  •  10 

Salesmen's  Traveling  Expenses 3,753-49 

Advertising 34,204.48 

Delivery  Expense 22,520.94 

Miscellaneous  Selling  Expenses 13,762 .80 

Management  and  OflSce  Salaries 3°, 735  •  28 

Office  Supplies 4,oi8 .  82 

Sundry  Office  Expense 6,255 .82 

Sales  Discount 21,269.77 

Purchase  Discount 9,258.61 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  629 

Credit  and  Collections 7,5o6 .  98 

Interest  Cost 12,448.83 

Income  from  Investments 1,958 .  10 

Interest  Income 1,040 .  05 

Exchange  Profit  and  Loss 5,343  ■  75 

Commissions  Earned 2,864  ■  09 

Stamp  Taxes 751 .  26 

Interest  on  Margins 568 .  75 

Interest  on  Deposit  with  Association 471  30 


$2,252,035.39    $2,252,035.39 


All  deferred  and  accrued  items  have  been  brought  onto  the  books. 
Distribute  In-freight,  Brokerage,  and  Purchase  Expenses,  85%  to 
Green  Coffee,  12%  to  Tea,  and  3%  to  Spices  and  Extracts. 
The  inventories  at  the  end  of  the  period  are: 

Green  coffee $206,467 .  45 

Roasted  coffee 72,576 .  26 

Teas 25,479 .  80 

Spices  and  extracts 8,683  •  5° 

Not  included  in  the  trial  balance  or  in  the  inventories  are  the  following 
adjustments  which  must  be  given  effect: 

1.  Actual  charges  on  sales  invoices  covering  green  coffee  are  $525.61 

more  than  the  pro-forma  amounts. 

2.  Actual  credits  on  purchase  invoices  covering  green  coffee  are  $137.40 

less  than  the  pro-forma  amounts. 

3.  Green  coffee  afloat  is  $15,769.40,  covering  which  notice  of  accep- 

tance of  drafts  by  bankers  has  been  received. 

4.  Green  coffee  contracted  for,  of  which  no  notice  of  shipment  has 

been  received,  amounts  to  $10,374.82. 

5.  Balances  of  unused  letters  of  credit  amount  to  $12,500 

Depreciation  of  plant  and  equipment  is  estimated  as  4%. 

Set  aside  >^%  of  net  sales  as  a  reserve  for  doubtful  accounts. 

It  is  decided  to  write  down  the  exchange  membership  to  $8,000. 

A  trial  balance  of  the  customers  margin  ledger  shows  debits  of  $5,240.16 
and  credits  of  $20,990.90. 

An  analysis  of  Contract  Differences  account  shows  the  amount  due  clients 
on  open  options  as  $743.90,  the  claims  against  clients  as  $1,480,79,  the 
balance  representing  the  results  of  the  company's  own  operations. 

The  following  distribution  of  roasting,  grinding,  and  packing  expenses 
is  to  be  made : 


630  APPENDIX 

Grinding  and 

Expense  Item  Roasting  Packing 

Superintendence $1,250.80  $458. 12 

Labor 1,125.60            564.63 

Power 380 .  40            203 .  60 

Light  and  Heat 470.00            340.00 

Repairs  and  Maintenance 2,512.14  1,223.24 

Building  Expense 75  00              50.00 

Insurance : 

Normal 583 .  50            301 .  81 

Extra 500.00 

Depreciation 7A^°-  20  1,883 .05 

The  records  show  that  900,000  lbs.  of  coffee  were  roasted  for  the  trade 
and  2,000,000  lbs.,  costing  $392,640.17,  were  roasted  for  the  company. 

It  is  decided  to  reserve  $50,000  for  federal  taxes. 

Draw  up  a  pro-forma  balance  sheet  and  statement  of  profit  and  loss  with 
supporting  schedules. 

XI 

The  Caswell-Brown  Company,  Incorporated,  operates  a  store  with  four 
departments,  all  located  on  the  street  floor.  Departments  "B"  and  "D" 
occupy  the  same  amount  of  space  and  departments  A  and  C  twice  as 
much.  A  new  delivery  system  has  been  in  operation  during  the  year  just 
ended.  The  expenses  of  the  delivery  department  have  averaged  8.303  cents 
per  package  on  a  total  of  76,840  packages,  of  which  37,  23,  16,  and  24%  in 
number  have  been  delivered  respectively  for  departments  A,  B,  C,  and  D. 

The  expense  for  advertising  space  during  the  year  has  amounted  to 
$12,270,  covering  1,635,000  lines.  The  measurements  for  the  departments 
are: 

A 576,000  Lines 

B 268,000     " 

C 348,000     " 

D 384,000      " 

The  total  operating  expenses  for  the  year  are: 

Buying $17,730.00 

Selling 43,340.00 

Advertising,  space 12,270.00 

Advertising,  other 7,880 .  00 

Delivery 6,380 .  00 

Rent 15,000.00 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  631 

Maintenance  and  Operation  of  Plant 11,400.00 

General  and  Administrative 7,880.00 


Total  Operating  Expense $121,880.00 

The  inventories  at  selling  at  the  beginning  of  the  year  and  the  percentages 
of  "mark-on"  are: 

Department 

A $50,800.00  50% 

B 42,500.00  40 

C 90,000.00  45 

D 28,000.00  55 

The  net  purchases  during  the  year  at  cost,  and  the  total  of  the  original 
marked  selling  prices  of  these  purchases  are: 

Original  Marked 
Department  Cost  Prices         Selling  Prices 

A $63,000.00  $125,000.00 

B 40,000.00  73,000.00 

C 81,000.00  147,000.00 

D 41,400.00  93,500.00 

The  sales,  net  of  returns,  the  mark-ups,  and  mark-downs  for  the  year  are: 

Department  Sales  Mark-Ups  Mark-Downs 

A $109,000.00  $1,200.00  $12,600.00 

B 69,000.00  3,500.00  13,700.00 

C 143,000.00  none  13,400.00 

D 73,000.00  1,400.00  12,500.00 

The  transfers  to  and  from  departments  during  the  year  have  been : 

Transfers  from:  Transfers  to: 

Department                         At  Selling  At  Cost          At   Selling 

A $2,400.00  $1,600.00          $2,800.00 

B 1,300.00  500.00            1,000.00 

C 3,600.00  1,800.00            3,400.00 

D 4,500.00  1,000.00            2,100.00 

The  difference  between  the  total  of  the  transfers  from,  and  the  transfers 
to,  selling  departments  represents  the  transfers  to  expense  departments 
which  have  been  included  in  the  expense  amounts  mentioned  previously. 

Prepare  a  departmental  statement  of  earnings  and  expenses,  giving  gross 
profits  by  departments,  distribution  of  the  expenses  to  departments  as 
outlined  in  the  text,  and  net  profits  by  departments.  Book  inventories  are 
to  be  used  to  arrive  at  the  gross  profits. 


632  APPENDIX 

The  following  information  should  be  submitted  supporting  the  statement 
of  earnings  and  expenses: 

1.  Stock  account,  giving  details  of  book  inventory  figures 

2.  Figures  used  to  prepare  mark-ons. 

3.  Statement  of  method  of  distribution  of  expenses  over  departments. 

Prepare  turnover  figures  for  the  store  as  a  whole  and  for  the  departments. 

xn 

1.  The  firm  of  Smith,  Walker,  Richard,  and  Harris,  Certified  Public 
Accountants,  consists  of  ten  members,  four  good-will  partners  and  six  non- 
good-will  partners.  The  above-mentioned  names  represent  the  good-will 
partners,  who  are  to  receive  a  salary  of  $10,000  each.  The  six  non-good-will 
partners  are  to  receive  a  salary  of  $5,000  each.  The  number  of  shares,  good- 
will and  non-good- will,  held  by  each  partner  is  as  follows: 

Good-Will     Non-Good-WiU 

W.  Smith 25                       15 

H.  Walker 25                       15 

F.  Richards 25                        15 

J.  Harris 25                       14 

S.  Newton 8 

R.  Sanford 8 

J.  Carlson 7 

M.  Martin 6 

F.  Barrows 6 

A.  Nichols 6 

The  partnership  agreement,  under  which  the  firm  has  been  operating, 
provides  that  interest  on  capital,  including  undrawn  profits,  at  the  annual 
rate  of  6%,  is  to  be  charged  to  profits  and  credited  to  the  accounts  of  the 
good-wUl  partners,  before  profits  are  divided,  and  that  all  salaries  to  partners 
are  to  be  deducted  before  determination  of  the  respective  shares  of  profits. 
10%  of  each  non-good- will  partner's  compensation  based  on  partnership 
profits  over  and  above  salaries  is  to  be  retained  annually  by  the  partnership 
for  a  period  of  5  years.  The  sum  so  retained  is  to  bear  interest  at  the  rate 
of  6%. 

The  following  is  a  trial  balance  taken  from  the  firm's  books  as  of  August 
31,  19 — ,  covering  a  period  of  5  months: 

Cash  in  Bank $  18,425.52 

Petty  Cash  Fund 1,500.00 

Accounts  Receivable — Clients 3S,oi3  ■  20 

Unfinished  Engagements 25,653 .  25 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  633 

Reserve  for  Doubtful  Accounts $     1,1 74 .  67 

Accounts  Receivable — Chicago  Branch 28,341 .  20 

Accounts  Receivable — Kansas  City  Branch 27,541 .  24 

Accounts  Receivable — St.  Louis  Branch 19,450.47 

Accounts  Receivable — San  Francisco  Branch 32,801 .11 

Miscellaneous  Accounts  Receivable 2,300.00 

Traveling  and  Subsistence  Advances 2,252 .  25 

Library 3.S24-30 

Depreciation  Reserve — Library 500.00 

Furniture  and  Fixtures 4,830.50 

Depreciation  Reserve — Furniture  and  Fixtures 500 .  00 

Investments 62,500.00 

Accounts  Payable 47,431 .  20 

Non-Good- Will  Profits  Retained 17,231 .40 

W.  Smith,  Capital 30,000.00 

W.  Smith,  Personal 15,625 .98 

H.  Walker,  Capital 30,000 .  oo 

H.  Walker,  Personal 14,165 .  47 

F.  Richards,  Capital 30,000 .  00 

F.  Richards,  Personal 12,843  25 

J.  Harris,  Capital 30,000 .  00 

J.  Harris,  Personal 9A99  ■  83 

Partners'  Salaries 29,166 .  67 

Audit  Fees 158,450 .  50 

Miscellaneous  Accounting  Fees 17,321 .30 

Investigation  Fees 30,724. 20 

Cost  and  Efficiency  Fees 45,834 .  30 

Tax  Report  Fees 39,610. 50 

Chargeable  Salaries 173,679 .  23 

Salaries — Office  Manager  and  Assistants 9,641 .  20 

Postage 1,745  •  24 

Telephone  and  Telegraph 640.00 

Printing  and  Stationery 4,738 .90 

General  Office  Expense 2,634 .  15 

Office  SuppUes i,974 •  84 

Insurance 305 .00 

Professional  Society  and  Club  Memberships 1,220.00 

Legal  Expenses 4,410 .  20 

Library  Expense 178 .  40 

Unassigned  Salaries 8,364.90. 

Holiday  and  Vacation  Salaries 8,45 1 .  30 

Salaries — Bookkeeping  Department 7,320. 14 

Salaries — Correspondence  Department 2,310. 24 

Salaries — General  Filing 1,641 .30 


634  APPENDIX 

Salaries — Librarian 1,231 .  70 

Report  Department  General  Expenses 1,420. 14 

Traveling  Expense  of  Partners 1,474.30 

Office  Salaries 1,875.30 

Rent 3,600 .  00 

Light 240 .  00 

Income  from  Investments 4,321 .  24 

Overtime  Expense 2,837  •  65 


$535,233-84   $535,233-84 

During  the  month  of  September  the  following  transactions  occur; 

Voucher  Register: 

Staff  Accountants'  Salaries $11,850.00 

Report  Department  Salaries 400 .  00 

Partners'  Salaries 5,833  .  33 

Traveling  and  Subsistence  Advances 325 .  60 

Office  Manager  and  Assistants 810 .  50 

Office  Salaries 225  00 

Librarian — Salary 150.00 

General  Filing^Salaries 125 .00 

Bookkeeping  Department  Salaries i  ,000.00 

Correspondence  Department — Salaries 465 .00 

Rent 300.00 

Stationery  and  Printing 450.65 

Light 20.75 

Telephone  and  Telegraph 145 .  50 

Library  Expenses 253  .  75 

Office  Expenses 585 .  23 

Cash  Receipts: 

Accounts  Receivable 25,415 .  62 

Income  from  Investments 525 .00 

Cash  Disbursements: 

Accounts  Payable 21,135.06 

The  Earnings  and  Expense  Journal: 
Earnings  Section: 

Audit  Fees 23,625 .  00 

Miscellaneous  Accounting  Fees 2,910. 00 

Investigation  Fees 5,45°  ■  00 

Cost  System  and  Efficiency  Fees 7,213 .00 

Tax  Report  Fees 4,350.00 

Traveling  and  Subsistence  Advances 2,121 .  15 

Time  Analysis  Section: 

Chargeable  Salaries 9,682 .  00 

lloUday  and  Vacation  Salaries 2,285 .00 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  635 

Research 200 .  00 

Gratuitous  Service 83 .  00 

The  billing  record  showed  that  bills  rendered  to  clients  during  the  month 
amount  to  $22,736.85. 
The  following  items  are  to  be  considered  in  closing  the  books: 
Of  the  unfinished  engagements,  $10,525.75  represents  amount  of  flat- 
rate  contracts  unfinished.  Careful  estimate  of  work  still  to  be  done  indicates 
that  too  high  a  proportion  has  already  been  taken  into  earnings,  it  being 
the  practice  to  accrue  earnings  on  flat-rate  engagements  on  the  same  basis 
as  per  diem  engagements.  It  is  therefore  decided  to  make  the  following 
provision  to  cover  this  contingency: 

Audit  Fees $6,000 .  00 

Miscellaneous  Accounting  Fees 600.00 

Investigation  Fees 1,200.00 

Cost  and  Efl&ciency  Fees 1,800.00 

Tax  Report  Fees 1,500.00   $11,100.00 


The  accounts  show  prepayments  of  rent  $300,  professional  society  mem- 
berships $130,  and  insurance  $55.    Interest  receivable  amounts  to  $975. 

The  inventory  of  printing  and  stationery  is  valued  at  $1,428.  Deprecia- 
tion of  the  library  and  oflSce  furniture  and  fixtures  is  to  be  charged  at  the 
rate  of  10%  per  annum. 

It  is  considered  doubtful  whether  2%  of  the  accounts  receivable  bflled 
at  the  main  office  wUl  be  collected. 

An  analysis  of  non-good- will  profits  retained  shows  the  following  credits: 

S.Newton $3,362.23  M.Martin $2,521.66 

R.  Sanford 3,362.23  F.  Barrows 2,521.66 

J.Carlson 2,941.96  A.Nichols 2,521.66 

The  cash  unexpended  in  the  hands  of  staff  accountants  is  $425. 

An  analysis  of  flat-rate  engagements  unfinished  at  the  end  of  the  previous 
period  and  completed  during  the  current  period  shows  the  following  adjust- 
ments of  earnings  to  be  made  between  the  two  periods: 

Charges  to  preceding  period: 

Audit  Fees $i,735  •  20 

Miscellaneous  Accounting  Fees 425 .17 

Investigation  Fees 641 .  27 

Credits  to  preceding  period: 

Cost  and  Efficiency  Fees 895 .35 

Tax  Report  Fees 1,021 .69 


636  APPENDIX 

The  accounts  due  from  the  branch  offices  after  closing  show  upon  analysis 
to  be  composed  of  the  following  debits  and  credits: 

Cash $27,610. 12 

Accounts  Receivable  from  Clients.  .  .  .      59,370.24 

Reserve  for  Doubtful  Accounts $2,000.00 

Work  in  Progress 20,670.36 

Prepaid  Rent 100 .  00 

Prepaid  Insurance 245 .  20 

Library 4,712.30 

Depreciation  Reserve — Library 1,000.00 

Furniture  and  Fixtures 12,871 .80 

Depreciation  Reserve — Furniture  and 

Fixtures 1,000.00 

Accounts  Payable 13.446 .  00 

(a)  Take  off  a  trial  balance  September  30  before  adjusting  the  books. 

(b)  Prepare  a  consolidated  balance  sheet  and  profit  and  loss  statement 
for  the  6  months  ending  September  30,  19 — ,  taking  into  consideration  the 
provisions  of  the  partnership  agreement. 

2.  The  Arrow  Shoe  Manufacturing  Company  requested  the  firm  of 
Harden,  Slate,  and  Skinner  to  install  a  cost  system  and  audit  their  books. 
The  firm  accepted  the  offer  on  the  following  per  diem  basis: 

Senior  Accountants $35  per  day  of  7  hours 

Junior  Accountants i 20    "      "     "  "      " 

Supervising  Senior  Accountants 5°    "      "     "  "      " 

The  firm  assigned  two  seniors  and  four  juniors  to  the  case.  The  time 
reports  show  that  they  worked  10  weeks. 

Auditing  Work 4  weeks  of  39  hours  each 

Cost  Work 6      «       a    «      « 

The  supervisor  devoted  two  days  each  week  for  the  first  8  weeks  and  one 
day  each  during  the  ninth  and  tenth  weeks,  his  time  during  the  first  four 
weeks  being  chargeable  against  Auditing,  the  remainder  being  for  cost  work. 
The  firm  pays  its  staff  accountants  as  follows: 

Juniors $1,800  per  year 

Seniors 3,600    "      * 

Supervising  Seniors S.ooo    "       * 

For  costing  purposes,  the  daily  salary  rate  charge  is  reckoned  on  the  basis 
of  245  productive  days  per  year. 

The  accountants  assigned  to  the  case  were  advanced  $800  out  of  the 
petty  cash  fund.  The  following  is  a  summary  of  their  reports  of  expense 
chargeable  to  the  case." 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  637 

Expenses  for:  Acct.  i  Acct.  2  Acct.  3  Acct.  4  Acct.  5  Acct.  6  Super. 

First  week...  I14.53  $i5-75  |i3-69  $12.98  $13.85  $13.95  $7-25 

AllofOct...  53.91  53.91  51.64  52.54  51.55  52.50  28.00 

"    "  Nov...  52.65  51.80  51.25  51.65  50.96  51.75  28.07 

"    "  Dec....  20.41  20.12  19.65  19.49  19.99  19.49  13.20 

The  number  of  days  devoted  to  the  case  by  the  report  department  was 
4,  the  charge  per  day  being  $10  to  the  client.  This  is  to  be  charged 
into  costs  at  $7  per  day.  The  client  was  also  debited  with  $75  for 
partner's  time,  which  is  to  be  charged  into  cost  at  $40.  The  report 
department  expenses  and  partner's  time  are  to  be  charged  equally  to 
Audits  and  Cost  Work. 

An  additional  charge  for  overhead  was  taken  into  the  cost  records  on 
the  basis  of  an  hourly  rate,  which  was  determined  by  dividing  the  past 
year's  overhead  of  $44,623.76  by  the  productive  hours  for  the  year,  which 
were  52,000  in  number,  the  productive-labor  method  being  used. 

The  firm  records  the  income  accrued  on  work  at  the  end  of  each  week. 

A  bill  was  rendered  the  client  shortly  after  the  completion  of  the  engage- 
ment. 

(a)  Prepare  the  cost  record  for  the  case. 

(b)  Make  the  necessary  journal  entries  to  record  the  entire  transaction 
in  the  service  and  expense  journal. 

(c)  Make  the  necessary  journal  entries  for  the  billing  record. 

(d)  In  each  case  indicate  the  controlling  account  affected. 

xm 

1.  A  trial  balance  taken  from  the  general  ledger  of  the  Lance  Advertising 
Agency  for  the  1 1  months  ending  November  30,  19 — ,  contains  the  following 
items: 

Debit  Credit 

Accounts  Receivable $54,625 .00 

Accounts  Receivable — Reserve  for  Doubtful  Accounts.  $        375  00 

Accounts  Payable  (Trade  Creditors) 1,834.00 

Advertising  Expense 500 .  00 

Advertising  Cost 81,150.00 

Advertising  Sales 120,885 .00 

Auditing 250 .  00 

Cash  on  Hand 200 .  00 

Cash  in  Bank 13,600.00 

Capital  Stock 50,000 .  00 

Collection  and  Exchange 2,250  00 

Commissions  Earned 19,800  00 

Commissions  Paid 4)5°o  00 


6.^.8 


APPENDIX 


Development  and  No-Charge  Service 2,250 . 

Discounts  Allowed 4,860. 

Discounts  Earned 

Electric  Light 275 . 

Entertaining  and  Traveling i,3So. 

General  Expense 2,250. 

Good-Will 10,000 . 

Express  and  Cartage 125 . 

Furniture  and  Fixtures 3,250. 

Furniture  and  Fixtures — Depreciation  Reserve 

Ice  and  Water 50 . 

Insurance — Fire  and  Fidelity 25 . 

Interest  on  Notes  Payable 75 . 

Interest  on  Notes  Receivable 

Interest  on  Bank  Balances 

Interest  on  Liberty  Bonds 

Interest  on  Stocks  and  Bonds 

Legal  Expenses 500 .  00 

Mail  Service 180 .  00 

Newspaper  and  Magazine  Accounts  Payable 

Notes  Payable 

Notes  Receivable 1,000.00 

Postage 1,350.00 

Rebates  and  Allowances iQS  .00 

Rent 3,600.00 

Repairs  to  Building 180.00 

Real  Estate 12,000.00 

Salaries — Officers 9,000.00 

Salaries— Office 20,000.00 

Stationery  and  Office  Supplies 600.00 

Stocks  and  Bonds 3,000 .  00 

Surplus — Balance 

Taxes 600 .  00 

Telephone  and  Telegraph 250.00 

United  States  Liberty  Bonds 5,000.00 

Writing  and  Designing 2,500.00 


00 
00 

00 
00 
00 
00 
00 
00 

00 
00 
00 


10,800.00 


500.00 


100.00 

200.00 

212.00 

50.00 


16,684.00 
5,000.00 


10,600.00 


$239,290.00   $239,290.00 


During  the  month  of  December  the  following  vouchers  are  drawn  and 
paid:  Commissions  $500,  development  charges  $250,  electric  light  $25, 
entertaining  and  traveling  expenses  $150,  general  expense  $250,  mail 
service  $20,  postage  $150,  rent  $400,  repairs  $20,  oflScers'  salaries  $1,000, 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  639 

office  salaries  $2,000,  telephone  and  telegraph  $50,  writing  and  designing 
$1,500- 

The  following  transactions  occur  during  the  same  month:  Payments  on 
newspaper  accounts  payable  amount  to  $12,500,  less  discount  to  the  amount 
of  $2,000. 

The  amount  of  $17,000,  less  discounts  amounting  to  $450,  is  received 
from  customers. 

An  amount  of  $200  is  realized  from  the  sale  of  old  magazines,  papers,  etc. 

In  closing  the  books  at  the  end  of  December  the  following  adjustments 
must  be  considered: 

Advertising  cost  has  been  charged  from  contract  records  in  amount 
of  $3,500.  The  invoices  from  the  publishers  pertaining  to  this  service 
amount  to  but  $3,000.  The  difference,  viz.,  $500,  is  to  be  paid  the  following 
year  when  the  error  in  invoicing  by  publishers  is  discovered. 

Advertising  cost  has  been  charged  with  $5,000,  representing  advance 
charges  on  advertising  that  will  not  be  published  until  the  following  year, 
and  no  part  of  which  has  been  charged  to  the  client  nor  credited  to  sales. 

Included  in  advertising  cost  is  an  amount  of  $2,000  which  covers  a  charge 
for  advertising  the  agency. 

By  the  terms  of  a  contract  entered  into  with  the  Occidental  Trading 
Company,  the  agency  is  entitled  to  5%  of  the  company's  gross  sales  above 
$1,000,000.  The  company's  sales  for  the  year  amounted  to  $1,150,000. 
This  has  not  yet  been  taken  into  the  books. 

Of  the  development  and  no-charge  service,  $500  can  be  charged  to  clients. 

Writing  and  designing  charges  to  the  amount  of  $2,000  are  to  be 
charged  to  customers  at  an  advance  of  20%  to  cover  overhead,  and  the 
balance  can  be  carried  as  inventory. 

Stationery  and  office  supplies  on  hand  amount  to  $100. 

General  Expense  has  been  charged  with  $300  premium  for  insurance 
taken  out  several  years  ago  on  the  lives  of  officers  for  the  agency's  benefit 
but  not  previously  booked.  The  cash  surrender  value  of  the  policies  at 
December  31  is  $3,000.  The  unexpired  portion  of  the  premium  amounts 
to  $100. 

Fire  and  fidelity  insurance  unexpired  is  $16.67.  Rent  has  been  paid 
one  month  in  advance,  $400. 

$50  is  due  a  solicitor  for  commissions  which  have  not  been  paid. 

Collection  and  Exchange  account  represents  a  balance,  an  analysis  of 
which  discloses  that  $50  was  paid  to  the  banks  for  collection  of  out-of-town 
checks  and  the  balance  represents  the  amount  earned  on  foreign  exchange. 

Interest  accrued  on  Liberty  bonds  amounts  to  $13. 


640  APPENDIX 

Interest  accrued  and  dividends  declared  on  stocks  and  bonds  amount 
to  $25. 

Interest  on  notes  payable  at  6%  is  paid  2  months  in  advance. 

Interest  accrued  on  notes  receivable  amounts  to  $10. 

Real  estate  consists  of  land  $2,000,  and  buildings  $10,000. 

Subscription  to  United  States  Liberty  bonds  was  for  $8,000,  a  note 
having  been  given  at  the  time.  On  December  31,  $3,000  of  this  is 
still  unpaid  and  the  bonds  to  that  amount  are  being  held  by  the  bank  as 
collateral.  Dividends  were  paid  on  the  capital  stock  during  the  year  amount- 
ing to  10%. 

$600  of  the  accounts  receivable  are  doubtful  of  collection.  Set  up  the 
proper  reserve. 

Furniture  and  fixtures  have  depreciated  5%  in  value.  The  depreciation 
rate  for  buildings  is  2>^%,  which  is  considered  sufficient  to  take  care  of 
repairs.    Set  up  the  proper  reserves. 

Federal  income  and  excess  profits  tax  for  the  previous  year  amounted 
to  $150.  This  was  not  considered  at  that  time  when  the  books  were  closed. 
It  is  estimated  that  this  year's  tax  wUl  amount  to  $200.  Accrued  taxes  on 
real  estate  are  $150. 

Set  up  the  trial  balance  in  classified  form  on  the  working  sheet.  Make 
the  necessary  journal  entries  to  adjust  and  close  the  books.  Prepare  a 
balance  sheet  and  profit  and  loss  statement. 

2.  An  advertising  agency  has  billed  to  a  client  the  amount  of  $13,500, 
of  which  $1,500  is  for  special  copy- writing,  electrotypes,  half-tones,  etc. 
This  has  been  billed  at  an  advance  of  20%  over  the  amount  at  which  it 
was  carried  on  the  books  while  in  process.  Of  the  $12,000  charged  for 
advertising  space,  $8,000  has  been  placed  on  a  commission  basis  of  15%  and 
the  balance  at  10%.  The  agency  has  to  date  paid  bills  for  $10,000,  covering 
these  two  items  of  advertising  space  sold. 

Show  journal  entries  necessary  to  take  care  of  above  transactions  and 
ledger  accounts  affected. 

XIV 

A  trial  balance  taken  from  the  general  ledger  of  the  Penndorf  Hotel  for 
the  month  ending  October  31,  19 — ,  is  as  follows: 

Cash  in  Bank $46,500.00 

Petty  Cash 2,500 .  00 

Guests'  Cards 3,700.00 

Local  Accounts 22,100.00 

Direct  Provisions 4)893 .  75 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR  641 

Stores  Provisions 7,695  •  49 

Mineral  Water 6,595  ■  00 

Supplies 2,100.00 

Liberty  Bonds 10,000.00 

House  Furniture  and  Fixtures 165,000.00 

Depredation    Reserve  —  House     Furniture    and 

Fixtures $      21,000.00 

Kitchen  and  Restaurant  Equipment 30,000.00 

Depreciation    Reserve — Kitchen    and    Restaurant 

Equipment 3,600 .  00 

Barber  Shop  Equipment 5,000.00 

Depreciation  Reserve — Barber  Shop  Exjuipment. .  .  600.00 

China  and  Glass 10,000.00 

Depreciation  Reserve — China  and  Glass 1,200.00 

Silverware 13  000.00 

Depreciation  Reserve — Silverware 4,360.00 

Linen 13,230.00 

Depreciation  Reserve — Linen 3,360.00 

Miscellaneous  Equipment 25,625 .00 

Depreciation  Reserve — Miscellaneous  Equipment..  11,575.00 

Leasehold  and  Building 1,250,000.00 

Extinction  Reserve  for  Leasehold 675,000.00 

Notes  Payable 20,000 .  00 

Accounts  Payable 37»75ooo 

Unpaid  Expenses 572 .00 

Deposits  Due  Guests 825 .  00 

Capital  Stock,  Preferred 150,000 .  00 

Capital  Stock,  Common 450,000.00 

Surplus 202,188.85 

Income  from  Rooms 35,675  00 

Income  from  Restaurant 75,475 .00 

Income  from  Mineral  Water 12,400.00 

Income  from  Telephones 1,450.00 

Barber  Shops  and  Bootblack  Concession 3,200.00 

Cab  and  Taxi  Stand  Concession 300.00 

Cigar  and  Newsstand  Concession 3,400.00 

Coat  Room  Concession 450 .  00 

Kitchen  By-Product  Sales 150.00 

Direct  Provisions — Purchases 16,025 .39 

Direct  Provisions — Purchase   Returns   and   Allow- 
ances  i  1,225.68 

Stores  Provisions — Purchases 11,538.08 

Stores  Provisions — Purchase   Returns  and   Allow- 
ances  -  2,342.5? 


642  APPENDIX 

Laundry 1,500.00 

Light,  Heat,  and  Power 2,500.00 

Insurance 2,400.00 

Building  Repairs  and  Maintenance 3,253 .65 

Telephone 1,250.00 

Rent * 4,500.00 

Room  Expense 20,129.00 

Restaurant  Expense 25,571 .00 

Mineral  Water  Expense 3,400.00 

Interest  Cost 100.00 

Cash  Short  and  Over 7 .  50 

Office  Salaries 5,000.00 

Advertising 600 .  00 

Legal  Expense 500.00 

General  Expense 1,000.00 

License  Fees 1,200.00 

Purchase  Discount 265 .  24 

Interest  Income 49  •  50 


$1,718,413.86    $1,718,413.86 

From  the  subsidiary  records  the  following  analyses  are  available: 

Room  Expense: 

Pay-Roll $10,042 .  50 

House  Expense 75o. 25 

House  Supplies 1,775 .40 

Music  and  Flowers 1,500.00 

Repairs  and  Renewals — Furniture i  ,979 .  50 

Repairs  and  Renewals — Furnishings 2,890.45 

Painting  and  Decorating 1,190.90 

Restaurant  Expense: 

Pay-Roll — Restaurant $  5,474.80 

Pay-RoU — Kitchen,  etc 10,946 .  70 

Flowers  and  Music 4,500 .  00 

Linen  and  Supplies 550.00 

Gas  and  Fuel 2.135  .og 

China  and  Glassware 574 .  21 

Kitchen  Expense 940 .  20 

Printing 450 .  00 

Mineral  Water  Expense: 

Purchases $2,500.00 

Breakage 375.00 

Pay-Roil 250.00 

Sundry  Expense,  Supplies,  etc 275 .00 


PRACTICE  WORK  FOR  FIRST  H.\LF-YEAR 


643 


Laundry : 
Pay-RoU. 
Supplies. 
Gas 


The  following  distribution  of  overhead  is  to  be  made: 


$899 . 50 
479.00 
121.50 


Light,  Heat, 

Rent  and  Power 

House $2,400.00  $1,280.00 

Restaurant 1,050.00  1,000.00" 

150.00  10.00 

75.00  10.00 

300.00  50.00 

100.00  15.00 

125.00  20.00 

200 .00  40 . 00 

100.00  75-00 


Mineral  Water 

Telephone 

Barber  Shop  and  Bootblack. 

Cigar  and  Newsstand 

Coat  Room 

General 

Laundry 


Buildings 

Repairs  and 

Maintenance 

$2,475-65 

525-00 


50.00 


13.00 

90.00 

100.00 


Depreciation  of  leasehold  and  buildings  is  based  on  the  unexpired  lease 
term  of  50  years. 

All  other  depreciation  is  at  the  rate  of  12%  a  year. 

Miscellaneous  equipment  includes  laundry  $7,890,  mineral  water 
$3,110,  telephone  $2,200,  cigar  and  newsstand  $575,  coat  rooms  $935. 
Of  the  linen,  $9,000  belongs  to  the  housekeeping  department.  Bad  debts 
are  estimated  as  1%  of  the  outstanding  accounts.  Laundry  costs  are  to  be 
charged  %  to  rooms  and  J^  to  restaurant. 

The  employees  of  the  hotel  are  distributed  as  follows:  150  to  restaurant 
and  kitchen,  91  to  rooms,  4  to  mineral  water,  4  to  telephone,  12  to  laundry, 
and  15  to  office.  Estimated  cost  of  meals  is  $1  per  day,  except  for  the  office 
force,  for  which  the  cost  is  $1.75.  Officers'  a  la  carte  meal  sales,  in- 
cluding complimentary  meals,  are  $1,475.90. 

Inventories  at  the  end  of  the  month  are: 

Direct  provisions $  5,490.80 

Stores  provisions 10,979  ■  4o 

Mineral  waters 4,140. 25 

General  supplies 1,890 .  10 

Requisitions  of  provisions  for  the  month  amount  to   $5,978.49 
In  closing  the  books  it  is  decided  to  charge  to  the  current  month  }/i  of  the 
cost  of  repairs  of  furniture  and  furnishings,  and  of  the  cost  of  painting  and 
decorating,  and  H  of  the  insurance  cost.    All  accruals  are  reflected  in  the 
trial  balance. 


644  APPENDIX 

Included  in  both  restaurant  sales  and  costs  are  mineral  water  sales 
of  $4,375.40.    These  were  charged  to  the  restaurant  at  sales  price. 

Draw  up  a  pro-forma  balance  sheet  and  statement  of  profit  and  loss  for 
the  month,  with  supporting  schedules. 

XV 

The  trial  balance  of  a  municipal  ledger  on  December  31,  19 — ,  appears 
as  follows  (no  fund  accounts  are  kept) : 

Cash  on  Hand  and  in  Banks $  290,cxx) .  00 

Accounts  Receivable 350,000.00 

Investments 400,000 .  00 

Deferred  Charges ". 40,000 .  00 

Deferred  Special  Assessments  Receivable 350,000 .  00 

Fixed  Assets 4,000,000 .  00 

Interfund  Assets 165,000.00 

Audited  Vouchers $  7S,ooo . 00 

Contracts  Payable S5,ooo .  00 

Temporary  Loans 100,000 .  00 

Other  Current  Liabilities 30,000 .  00 

Deferred  Credits 15,000.00 

Fixed  Liabilities '.  1,500,000.00 

Interfund  Liabilities 165,000 . 00 

Proprietorship  January  i,  19 — 3,605,000.00 

Taxes  and  Tax  Penalties 550,000 .  00 

Licenses  and  Permits 50,000 .  00 

Fines  and  Forfeits 15,000.00 

Grants  and  Gifts 10,000 .  00 

Special  Assessments 220,000.00 

Departmental  Earnings 40,000 .  00 

Public  Service  Enterprises 200,000.00 

Interest 60,000 .  00 

Other  Revenues 5,000.00 

Non-Revenue  Receipts 400,000 .  00 

Administration 50,000 .  00 

Protection  of  Person  and  Property 100,000 .  00 

Health  and  Sanitation 80,000 .  00 

Charities  and  Corrections 70,000.00 

Highways  and  Bridges 150,000 .  00 

Education  and  Recreation 260,000 .  00 

Public  Service  Enterprises 1 70,000 .  00 

Indebtedness 160,000 .  00 

Unclassified 10,000 .  00 

Outlay  from  Revenue 240,000 .  00 


PRACTICE  WORK  FOR  FIRST  HALF-YEAR 


645 


Non-Revenue  Outlay 

Non-Revenue  Disbursements. 


85,000.00 
125,000.00 


$7,095,000.00    $7,095,000.00 


The  following  information  is  obtained  from  the  auditor's  office: 

Depreciation  (not  entered)  on  special  assessment  assets  $5,000;  on  capital 
assets  $15,000. 

Outlay  from  Revenue,  $240,000,  is  made  up  of  $25,000  utility  outlay, 
$5,000  other,  and  $210,000  special  assessment. 

Indebtedness  contains  special  assessment  bonds  $10,000,  utility  bonds 
$10,000,  other  $55,000. 

Non-Revenue  Receipts  contain  special  assessment  bonds  $30,000,  other 
bonds  $85,000. 

(a)  Prepare  closing  journal  entries. 

(b)  From  the  data  given  above  and  the  following  information,  prepare  a 
consolidated  and  fund  balance  sheet: 


General 

Special 
Assessment 

Utility 

Capital 

Sinking 
Fund 

$170,000 

1  30,000 

$  35.000 

$    25,000 

$14,000 

150,000 

40,000 

148,000 

50,000 

300,000 

20,000 

10,000 

10,000 

1,000,000 

1,200,000 

1,800,000 

30,000 

25,000 

40,000 

70,000 

20,000 

15,000 

20,000 

5,000 

10,000 

30,000 

20,000 

5,000 

100,000 

30,000 

10,000 

5.000 

300,000 

500,000 

700,000 

90,000 

40,000 

30,000 

312,000 

1,010,000 

873.000 

1,127,000 

330.500 

Trust 


Cash 

Accounts  Receivable .... 

Investments 

Deferred  Charges 

Fixed  Assets 

Interfund  Assets 

Audited  Vouchers 

Contracts  Payable 

Temporary  Loans 

Other  Current  Liabilities 

Deferred  Credits 

Fixed  Liabilities 

Interfund  Liabilities 

Proprietorship 


$16,000 
12,000 
50,000 


5,000 


5,000 
52.500 


(c)   Prepare  consolidated  and  fund  income  and  outgo  statement  with  the 
aid  of  the  following  information : 

Taxes  include  $40,000  paid  by  utility  fund. 
Grants  and  gifts — general    fund  $4,000,  trust  funds  $6,000. 
Special  assessments — for  expense  $15,000,  for  outlay  $205,000. 
Departmental  earnings — general  $40,000,  including  $30,000  profit 
paid  by  utility  fund  to  general. 


646  APPENDIX 

Public  service  enterprises — general  $40,000,  utility  $160,000  (in- 
cluding $50,000  from  general). 

Interest — general  $20,000,  special  assessment  $5,000,  utility  $7,000, 
capital  $3,000,  sinking  fund  $15,000,  trust  fund  $10,000. 

Other  revenues — general  $3,000,  utility  $2,000. 

Non-revenue  receipts — agency  transactions  $225,000,  special 
assessment  bonds  $30,000,  other  bonds  $85,000,  sinking  fund 
instalment  from  general  $55,000,  trust  fund  from  general  $5,000. 

Administration — general  $48,000,  sinking  fund  $1,500,  trust  $500. 

Protection  of  person  and  property  includes  $50,000  paid  by  general 
to  utility. 

Public  service  enterprises  include  $40,000  taxes  paid  to  general, 
and  $30,000  profit  paid  to  general  as  indicated  above. 

The  amount  of  indebtedness  is  distributed  $135,000  to  general 
fund  and  $25,000  to  sinking  fund,  and  includes  an  elimina- 
tion item  of  $55,000  paid  by  general  to  sinking  fund. 

Unclassified  expenditures  are  distributed  $5,000  to  general  and 
$5,000  to  trust. 

Bonds  retired  by  revenues  and  sinking  fund,  $75,000,  are  dis- 
tributed $10,000  to  special  assessments,  $10,000  to  utility,  and 
$5 5,000  to  capital. 

(d)  Prepare  indebtedness  statement  with  the  aid  of  the  following  addi- 
tional information : 

Assessed  Valuation $15,000,000.00 

%  Assessed  to  true  value 75% 

Indebtedness  limitation 10% 

Special  Assessment  bonds — guaranteed $270,000.00 

Population 250,000 

Tax  limitation 2% 


APPENDIX  B 

PRACTICE  WORK  FOR  STUDENT— SECOND 
HALF-YEAR 

The  problems  of  this  appendix  comprise  the  practice  work  for 
the  second  half-year.  For  the  purpose  of  allowing  flexibility  in 
assignments,  more  material  is  given  than  will  ordinarily  be  used. 
The  work  is  laid  out  on  the  basis  of  a  15-  or  16-week  semester. 

The  problems  have  little  or  no  sequence.  They  have  been 
drawn  largely  from  the  examinations  set  by  the  American  In- 
stitute of  Accountants  and  by  various  state  C.P.A.  boards,  to 
all  of  whom  the  author  desires  to  acknowledge  the  courtesy 
extended  him  in  allowing  their  use. 

The  purpose  of  this  group  of  problems  is  to  train  the  student 
in  ability  to  perceive  readily  the  vital  points  involved,  and  then 
to  set  up  his  solution  in  such  form  as  will  properly  display  his 
grasp  of  the  points  at  issue.  Only  by  long  and  constant  practice 
will  the  ability  to  read  a  problem,  or  to  size  up  a  given  situation 
be  acquired.  A  careful  analysis  based  on  correct  accounting 
principles  must,  of  course,  precede  the  formal  set-up  of  a  solution. 

Of  the  two  steps  always  necessary  in  formal  problem  work,  or 
in  the  field  of  actual  practice,  analysis  is  perhaps  the  more  im- 
portant. The  basic  elements  in  a  given  situation  having  been 
laid  bare,  the  plan  of  procedure  almost  automatically  presents 
itself.  The  constructive  side,  viz.,  the  manner  of  presentation, 
must  not,  however,  be  slighted.  There  is  much  of  real  art  in  the 
ability  to  set  up  exhibits  and  schedules  which  will  show  openly 
the  true  conditions.  Most  statements  present  the  facts,  but  so 
often  in  such  a  way  that  most  careful  and  detailed  analyses  are 
necessary  before  their  inter-relationships  become  apparent.  In 
many  statements  there  is  evidence  of  a  consummate  art  in 
obscuring  vital  relationships. 

647 


648  APPENDIX 

The  purpose,  therefore,  of  these  problems  is  to  develop 
ability  and  facility  in  the  analysis  of  business  facts  and  the  proper 
presentation  of  results. 

I 

1.  The  firm  of  A  and  B  began  business  on  January  i,  1918,  the  terms 
of  the  partnership  contract  specifying  that  no  interest  was  to  be  credited 
on  investments  or  charged  on  withdrawals,  and  all  profits  or  losses  were 
to  be  shared  equally.     A  invested  $24,000  and  B,  $15,000. 

On  November  30, 1920,  the  partnership  was  dissolved,  and  as  the  books 
had  not  been  properly  kept,  the  following  statement  was  submitted  to 
the  partners  as  a  basis  for  settlement,  and  agreed  to  by  them:  cash 
$14,200;  net  debit  of  A  $6,300;  expenses  $15,300;  net  credit  of  B  $10,500; 
profit  and  loss, debit  $9,000;  credit$i,5oo;  real  estate  having  an  estimated 
market  value  of  $3,300;  the  bank  holds  firm's  6  months'  6%  note  for 
$10,000,  due  January  31,  1921,  on  which  interest  is  unpaid. 

B  liquidated  the  assets  and  liabilities  and  in  due  course  sold  the  real 
estate  for  $4,000  and  paid  off  the  note  when  due. 

Prepare  the  partners'  accounts  as  of  November  30,  1920  and  as  of  the 
close  of  liquidation,  and  a  balance  sheet  as  of  November  30,  1920. 

2.  A  and  B,  equal  partners  in  a  manufacturing  business,  admit  their 
factory  superintendent,  C,  as  an  equal  partner  with  them  in  the  profits 
without  his  furnishing  any  capital,  A  and  B  reserving  to  themselves  in 
case  of  dissolution  any  good-will  which  may  have  accrued  to  the  business. 

On  December  31,  19 — ,  a  balance  sheet  was  drafted  and  approved  by 
all  concerned  as  follows: 

Assets 

Real  Estate  and  Plant $90,000.00 

Merchandise  Inventory 35,000.00 

Accounts  Receivable 25,000.00 

Notes  Receivable 15,000.00 

Cash 18,000.00    $183,000.00 

Liabilities 

Notes  Payable $10,000.00 

Accounts  Payable 12,500.00 

A's  Account $4,500.00 

B's  Account 4,000.00 

C's  Account 2,000.00       10,500.00 

Capital  Accounts: 

A 75,000.00 

B 75,000.00    $183,000.00 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  649 

Later  the  business  was  sold  as  a  "going"  concern  and  the  partnership 
dissolved.  The  purchaser  assumes  all  outside  liabilities  and  pays  the 
sum  of  $225,000  cash,  the  real  estate  and  plant  being  valued  at  $120,000. 
Make  the  entries  necessary  to  close  the  books  of  the  partnership,  and  show 
the  condition  of  the  partners'  accounts  after  closing. 

3.  A  is  a  manufacturer  of  carpets,  and  his  balance  sheet  at  a  certain 
date  appears  as  follows: 

Assets 

Cash  in  Bank $      815.00 

Real  Estate,  Appraised  Value 20,000.00 

Machinery,  after  10%  Depreciation 40,000.00 

Book  Accounts  Receivable 7,227.50 

Inventory  Stock  Finished 11 ,000.00 

Inventory  Stock  in  Looms 850.00 

Inventory,  Raw  Material  and  Supplies 107.50    $80,000.00 

Liabilities 

Bills  Payable $22,000.00 

Book  Accounts  Payable 28,000.00       50,000.00 

He  agreed  to  sell  B  one-half  interest  in  the  business  for  the  sum  of 
$20,000,  to  be  contributed  to  the  new  firm,  which  was  to  take  over  A's 
assets,  with  the  exception  of  the  real  estate,  and  to  assume  all  his  liabilities. 
The  good-will  of  A's  business  was  to  be  rated  at  $20,000  in  the  new  firm's 
books.  It  was  discovered  shortly  after  the  commencement  of  business 
of  the  new  firm  that  the  inventory  of  finished  stock  was  incorrect,  its 
value  being  $8,500  instead  of  $11,000.  It  was  also  found  that  of  the  book 
accounts  receivable  only  $6,227.50  were  collectible.  One  of  the  debtors 
owing  $1,000  had  failed  and  absconded,  previous  to  the  formation  of  the 
copartnership,  leaving  no  assets.  This  fact  was  known  to  A  and  his  book- 
keeper had  been  instructed  to  charge  off  the  account  but  failed  to  do  so. 
No  correction  was  made  of  these  discrepancies.  The  new  firm's  trial 
balance  at  the  end  of  the  first  year's  business  appeared  as  follows: 

A  Capital  Account $  25,000.00 

B  Capital  Account 25,000.00 

A  Personal  Account $     3,000.00 

B  Personal  Account 3,000.00 

Merchandise 78,000.00 

Book  Accounts  Receivable 15,400.00 

Expense 1,500.00 

Machinery 40,000.00 

Manufacturing  Expense 22,000.00 


650  APPENDIX 

Wages 44,000.00 

Rent 1 ,500.00 

Profit  and  Loss 600.00 

Book  Accounts  Payable 45,000.00 

Cash 22,000.00 

Good-Will 20,000.00 

$173,000.00     $173,000.00 


The  inventory  at  close  of  year  footed  up  as  follows: 

Finished  Stock $28,000.00 

Stock  in  Looms 1,500.00 

Raw  Material  and  Supplies 1,500.00     $31,000.00 

No  amount  had  been  charged  off  for  depreciation  of  machinery,  which 
should  have  been  10%. 

Make  proper  entries  to  correct  books,  and  formulate  balance  sheet 
showing  the  standing  of  the  firm,  and  give  a  reason  for  any  correction 
that  may  be  made. 

n 

1.  A  and  B  were  partners  in  the  business  of  manufacturing  lathes, 
sharing  profits  equally.  B  was  the  financial  man  having  charge  of  the 
books  and  accounts;  A  had  invented  the  lathe  and  knew  the  practical 
part  of  the  business.  On  January  i,  1916,  B  retired  from  the  concern. 
The  capital  accounts  of  the  two  partners  on  that  date  stood  A,  $15,000, 
and  B,  $16,000.  A  agreed  to  pay  B  for  his  half -interest  in  the  business 
the  sum  of  $20,000.  Of  this  amount,  $5,000  was  paid  in  cash  (from  the 
funds  of  the  firm),  and  for  the  remainder  B  accepted  A's  note,  which  was 
secured  by  a  mortgage  on  A's  dwelling  house.  Because  of  A's  lack  of 
knowledge  regarding  accounts,  the  cash  payment  alone  appeared  on  his 
books. 

A  conducts  the  business  himself  for  five  years.  He  was  not  aware  of 
the  fact  that  B  had  regularly  depreciated  machinery  10%  per  year  (on  the 
reducing  basis)  and  failed  to  take  depreciation  into  consideration  when 
closing  his  books.  The  profit  and  loss  accounts  on  his  books  showed 
profits  for  these  five  years  to  have  been  $5,000,  $5,300,  $6,750,  $8,500,  and 
$10,600.     A  had  withdrawn  over  and  above  salary,  $16,250. 

C,  a  friend  of  A's,  also  a  practical  machinist,  came  into  possession  of  a 
large  inheritance.  He  knew  the  flourishing  condition  of  A's  business  and 
wished  to  buy  a  half -interest.  The  premises  which  A  was  occupying  were 
poorly  adapted  to  the  needs  of  the  business.   They  both  were  of  the  opin- 


PRACTICE  WORK  FOR   SECOND  HALF-YEAR  651 

ion  that  a  modern  factory  building  would  very  materially  reduce  the  cost 
of  production  and  also  facilitate  prompt  delivery.  They  agreed  that  the 
good-will  was  worth  three  times  the  average  profits  for  the  last  five  years. 
C  was  to  obtain  a  half-interest  in  the  business  and  good-will,  by  investing 
cash  equal  to  A's  capital  account  and  half  the  good-will  on  January  i, 
1921. 

A's  bookkeeper,  on  January  i,  1921,  made  up  the  following  statement: 

Cash  $150;  machinery  $45,000;  accounts  receivable  $14,000;  finished 
lathes  (20)  costing  $500  each,  selling  price  $750;  half-finished  lathes  (10) 
costing  $325  each;  stock  of  bar  iron,  castings,  wheels,  extras,  and  other 
supplies,  $3,500;  with  liabilities  in  the  shape  of  accounts  and  bills  payable 
amounting  to  $30,000. 

The  above  figures  did  not  take  into  consideration  depreciation  on  ma- 
chinery. A  had  bought  machinery  for  the  plant  during  the  five  years  as 
follows:  $3,000,  $3,500,  $4,000,  $4,500,  $5,000  respectively. 

It  is  desired  to  place  the  full  value  of  the  Good-Will  account  on  the 
books.  C  was  admitted  as  of  January  i,  192 1,  on  the  above  terms  and 
according  to  the  figures  given  above. 

Show  the  entries  necessary  to  give  effect  to  the  wishes  of  the  part- 
ners. 

On  March  i,  the  Carman  Company  instructed  A  to  deliver  two  ma- 
chines which  A  had  been  holding  for  shipping  instructions  since  Septem- 
ber, 1920.  The  bookkeeper  then  awoke  to  the  fact  that  these  had  been 
charged  on  his  books  on  September  20, 1920;  that  he  had  overlooked  this 
charge  and  had  included  them  in  his  inventory.  The  partners  agreed  to 
make  the  correct  adjustment  at  the  end  of  the  year.  Being,  however, 
unable  to  arrive  at  an  agreement  at  that  time,  they  called  in  an  accountant, 
who  found  the  following  facts  recorded  on  their  books: 

Cash  $1,000;  machinery  $50,000;  building  and  real  estate  $40,000; 
accounts  receivable,  good,  $9,000;  sales  $122,480;  purchases  from  January 
I  to  date  $50,000;  wages  $36,000;  rent  $3,000;  manufacturing  expenses 
$10,000;  selling  and  administrative  expense  $6,000;  accounts  payable 
$4,000;  expense  of  moving  machinery  $7,375;  good-will  (?);  A,  Capital 
account  (?);  C,  Capital  account  (?);  stock  on  hand,  5  finished  lathes  at 
$500  cost,  1 4  half -finished  at  $3  2  5 ,  and  raw  material  and  supplies  amounting 
to  $8,000. 

While  moving  the  machinery  from  the  old  building  to  the  new  factory 
it  was  necessary  to  work  overtime  in  order  to  get  out  lathes  to  fill  orders 
for  customers,  for  which  wages  were  paid  at  the  rate  of  time  and  a  half. 
The  amount  of  such  overtime  was  $9,000,  and  was  included  in  the 
$36,000  mentioned  above. 


652  APPENDIX 

Both  partners  were  fair-minded ;  neither  desired  to  obtain  an  advantage 
over  the  other.  Both  agreed  on  a  depreciation  from  January  i,  1916,  at 
the  rate  of  10%  on  the  reducing  basis.  They  also  agreed  that  a  contribu- 
tion should  be  made  by  the  partner  having  the  lesser  capital  to  bring  his 
interest  up  to  that  of  the  other,  also  that  in  distributing  the  profits  for  the 
current  year  an  allowance  of  6%  interest  on  excessive  capital  invested 
during  the  past  year  should  be  made. 

Make  a  statement  to  be  given  to  the  partners  and  show  on  this  state- 
ment the  amount  necessary  to  be  contributed,  also  the  division  of  profits 
for  1 92 1,  and  make  any  correcting  entries  you  think  necessary. 

2.  A,  B,  and  C  formed  a  partnership.  A  agreed  to  furnish  $10,000, 
B  and  C  $7,000  each.  A  was  to  manage  the  business  and  receive  one- 
half  of  the  profits;  B  and  C  were  each  to  receive  one-fourth.  A  supplied 
merchandise  worth  $8,500,  but  no  additional  cash.  B  turned  over  to  A, 
as  managing  partner,  $9,000  cash,  and  C  turned  over  $5,500.  The  busi- 
ness was  conducted  by  A  for  some  time  but  without  keeping  exact  books. 
While  managing  the  business,  A  purchased  additional  merchandise 
amounting  altogether  to  $75,000  and  made  sales  of  $100,000.  The  cash 
received  and  paid  out  for  the  partnership  was  not  kept  separate  from  A's 
personal  cash.  In  order  to  straighten  out  matters,  B  took  over  the  man- 
agement. He  found  receivables  amounting  to  $20,000  and  of  these  he 
collected  $4,500.  The  merchandise  still  on  hand  he  sold  for  $500. 
These  receipts  he  deposited  in  a  bank  to  the  credit  of  the  firm.  The  re- 
maining accounts  proved  worthless.  The  outstanding  accounts  payable 
amounted  to  $2,000,  of  which  $1,500  had  been  incurred  in  purchasing 
merchandise  and  $500  for  expenses.  These  accounts  he  paid.  A  pre- 
sented vouchers  showing  that  during  his  management  he  had  paid  other 
expenses  of  $2,400.  By  mutual  agreement  B  was  held  to  be  entitled  to 
$100  on  account  of  interest  on  excess  capital  contributed  and  A  and  C 
were  to  be  charged  $75  each  for  shortage  in  contribution  of  capital, 

(a)  Prepare  Trading  and  Profit  and  Loss  accounts  and  account  of  each 
of  the  partners,  indicating  the  final  adjustment  to  be  made  in  closing  up 
the  partnership. 

(b)  Show  how  the  above  fijial  adjustment  would  be  modified  if  Aproved 
to  have  no  assets  or  liabilities  outside  the  partnership. 

3.  For  the  purpose  of  making  a  joint  speculation  in  stocks,  A  con- 
tributes $3,000,  B  $2,000,  and  C  $1,000,  and  they  agree  to  share  the  profits 
or  loss  in  proportion  to  the  amounts  contributed.  October  15,  1920,  A 
deposited  the  $6,000  with  his  broker,  giving  instructions  to  buy  300 
shares  of  New  York  Central  and  300  shares  of  Chicago,  Burlington  and 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  653 

Quincy.  The  order  was  executed  October  16, 1920,  New  York  Central  at 
130  5/8,  and  Chicago,  Burlington  and  Quincy  at  127.  April  10,  1921, 
under  instructions  from  A,  New  York  Central  was  sold  at  151  1/8  and 
Chicago,  Burlington  and  Quincy  at  191  1/2,  a  check  being  received  from 
the  broker  to  close  the  account.  How  much  does  A  owe  B  and  C  for  their 
interests  in  the  deal  calculating  interest  at  6%  (365  days  to  the  year), 
broker's  commission  at  1/8%  of  the  par  value  of  $100  per  share,  and 
revenue  tax  of  $2  for  each  100  shares? 

m 

1.  The  Patent  Specialty  Company  was  organized  July  i,  19 — ,  with  a 
capital  of  $100,000  to  manufacture  novelties.  The  following  transactions 
occurred : 

July  I,  19 — ,  one-half  of  the  capital  stock  was  subscribed  and  issued, 
10%  being  called  and  paid  on  that  date  in  cash.  Legal  and  other  incor- 
poration expenses  amounting  to  $500  were  paid. 

August  20, 19 — ,  patent  covering  novelty,  was  purchased  for  $50,000, 
payable  one-half  in  stock  and  one-half  in  cash;  the  stock  was  issued  and 
delivered,  $2,000  paid  in  cash  and  note  given  for  balance,  due  in  one 
month,  6%  interest.  The  patent  was  subject  to  royalty  rights  granted  to 
the  Novelty  Company  which  terminated  at  date  of  purchase.  All  ac- 
crued royalties  were  to  pass  with  patent  and  no  royalty  rights  were 
granted  by  the  Patent  Specialty  Company. 

August  27,  19 — ,  the  village  board  of  trade  donated  a  lot  valued  at 
$5,000  in  consideration  of  agreement  to  erect  and  equip  a  plant  at  cost 
of  not  less  than  $25,000. 

September  13, 19 — ,  a  further  call  of  70%  on  the  stockholders  was  paid. 
The  note  given  in  part  payment  for  the  patent  was  paid  at  maturity. 
December  31,  19 — ,  the  following  facts  existed: 

Payments  on  account  of  salaries,  interest,  insurance,  etc.,  amounted 
to  $2,250,  with  $250  accrued;  contracts  for  construction  and  equipment 
amounting  to  $35,000  had  been  given  and  were  75%  completed  and  40% 
paid;  royalties  amounting  to  $2,725  had  been  received  and  $190  was 
accrued. 

Prepare  journal  entries  to  cover  foregoing,  and  also  statement  to 
display  financial  condition  at  December  31,  19 — . 

2.  A  corporation  is  formed  with  a  capital  stock  of  $500,000,  of  which 
$200,000  is  preferred  and  $300,000  is  common  stock,  to  acquire  and  con- 
solidate three  existing  corporations  designated  as  A,  B,  and  C,  and  having 
the  following  status  respectively: 


654  APPENDIX 

Assets  Liabilities           Surplus  Deficit  Capital 

A $171,000.00  $  56,000.00      $15,000.00      $100,000.00 

B 165,000.00          80,000.00       $5,000.00  90,000.00 

C 108,000.00  47,000.00          6,000.00      55,000.00 

$444,000.00  $183,000.00      $21,000.00  $5,000.06  $245,000.00 


The  several  vendor  companies  contract  with  the  promoter  to  sell  their 
assets,  as  above  stated,  including  good-will,  but  excluding  cash  funds,  at 
the  following  prices  respectively,  viz.:  A  $125,000;  B  $100,000;  C  $75,000, 
payable  one-half  in  cash  and  one-half  in  preferred  stock  to  be  issued 
therefor  by  the  new  compan}',  which  is  also  to  assume  all  outstanding 
obligations. 

The  promoter  or  vendor  contracts  with  the  new  or  vendee  company 
to  acquire  the  several  properties  subject  to  the  liabilities  as  stated,  and  to 
provide  an  additional  working  capital  of  $100,000  cash,  and  to  take  in 
payment  therefor  the  entire  authorized  capital  stock  of  the  new  company, 
out  of  which  the  subscribing  incorporators  and  directors  will  acquire  their 
stock  by  purchase  from  the  underwriters. 

The  common  stock  is  underwritten  by  bankers  at  80%,  with  bonus  of 
one  share  of  preferred  to  each  10  shares  of  common  stock.  The  bankers 
are  also  to  take  an  additional  $10,000  of  preferred  stock  at  par,  as  part  of 
their  agreement. 

(a)  Frame  the  opening  entries  and  balance  sheet  of  the  vendee  com- 
pany, showing  the  costs  respectively  of  assets,  good-will  and  organization 
expenses  on  the  assumption  that  the  terms  of  the  several  contracts  are 
known  to  all  the  parties  concerned  and  form  the.basis  of  the  initial  values 
established. 

(b)  Frame  closing  entries  of  A  company,  showing  cancellation  of  stock 
and  distribution  of  proceeds  of  sale  among  stockholders. 

(c)  Show  promoter's  compensation  or  profit  for  effecting  the 
consolidation. 

3.  Acting  through  an  agent  and  trustee,  a  syndicate  acquires  the 
following  assets  of  two  corporations  as  valued  by  appraisement  and 
examination: 

.    B  Z  Company       R  J  Company 

Timber  lands $1,500,000.00         $1,000,000.00 

Timber  rights 700,000.00  800,000.00 

Trams  and  logging  outfits 100,000.00  150,000.00 

Mill  structures  and  equipment 200,000.00  250,000.00 

Materials  and  siipplies 20,000.00  30,000.00 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  655 

B  Y  Company  R  J  Company- 
Logs 100,000.00  200,000.00 

Lumber 230,000.00  320,000.00 

Bills  and  notes  receivable 40,000.00  30,000.00 

Customers'  accounts 110,000.00  220,000.00 

$3,000,000.00  $3,000,000.00 


This  syndicate  organizes  a  lumber  company  and  sells  it  all  of  the  above 
property  and  accounts,  excepting  the  timber  lands.  The  syndicate  also 
makes  a  stumpage  contract  with  the  company,  conveying  the  right  at 
stipulated  prices  per  M  feet  to  remove  from  such  lands  all  of  the  milling 
timber.  The  syndicate  agrees  to  receive  as  a  consideration  $1,500,000  of 
the  lumber  company's  preferred  stock  and  $3,000,000  of  its  common  stock. 

The  syndicate  also  organizes  a  land  company  and  sells  it  the  timber 
lands  and  the  stumpage  contract  made  with  the  lumber  company,  and 
agrees  to  receive  as  consideration  $1,500,000  of  the  land  company's  first 
mortgage  bonds  and  $1,400,000  of  its  capital  stock. 

In  organizing  these  companies  the  syndicate  paid  into  the  treasury  of 
the  lumber  company  $500,000  in  cash  for  a  like  amount  of  its  common 
stock,  and  into  the  treasury  of  the  land  company  $100,000  in  cash  for  a 
like  amount  of  its  capital  stock. 

Prepare  a  balance  sheet  of  each  company,  giving  effect  to  the  organi- 
zation transactions  and  to  the  purchases  made  by  each  from  the  syndicate. 

IV 

1.  The  X  Y  Z  Corporation  has  an  authorized  issue  of  $5,000,000  first 
mortgage  5%  bonds  in  $1,000  denominations.  Of  these  $2,502,000  are  in 
the  hands  of  the  public,  and  the  balance  in  escrow  in  the  hands  of  trustees, 
to  be  taken  down  only  to  take  up  the  bonds  of  underlying  companies,  or 
for  new  construction  up  to  80%  of  the  expenditures;  but  the  net  earnings 
above  operating  expenses  and  taxes  for  the  previous  year  must  equal  at 
least  I  3/4  times  the  interest  on  all  outstanding  bonds,  including  those  to 
be  taken  down.  The  net  earnings  of  the  corporation  for  a  certain  year  were 
$273,990.44.  There  were  also  in  the  hands  of  the  public  the  following 
bonds  of  subsidiary  companies:  $106,000  5's  and  $295,500  4  1/2's.  The 
expenditures  for  construction  amounted  to  $300,000. 

State  how  many  bonds  can  be  taken  down  for  construction,  showing 
how  you  arrive  at  the  result. 

2.  A  corporation  issues  $100,000  in  20-year  bonds,  dated  January  i, 
191 8,  and  redeemable  out  of  revenue  by  means  of  20  annual  sinking  fund 


656  APPENDIX 

instalments  of  $5,000  each.  December  31,  1918,  $5,000  is  reserved  out  of 
profits  and  placed  to  the  credit  of  Reserve  for  Redemption  and  $5,000  is 
deposited  in  a  trust  company  at  2%  and  charged  to  Sinking  Fund  for  Re- 
demption. Separate  sinking  fund  books  are  opened  in  the  ledger  in  which 
Cash  is  charged  and  Sinking  Fund  credited  with  said  first  instalment. 

February  2,  1919,  investments  are  purchased  for  the  sinking  fund  and 
the  principal  thereof  is  charged  on  the  sinking  fund  books  to  separate  in- 
vestment accounts,  while  the  accrued  interest  is  charged  to  Revenue  from 
Investments.     The  investments  so  purchased  are  as  follows: 

1.  Two  5%  gold  bonds,  due  1950,  at  $1,000  each,  interest  payable 

May  I  and  November  i,  at  par  and  accrued  interest. 

2.  One  6%  gold  bond,  due  1940,  of  $1,000,  April  i  and  October  i,  at 

120  and  accrued  interest. 

3.  The  company  loans  on  first  mortgage,  $1,400  at  5%,  interest 

payable  August  i  and  February  i. 

The  interest  is  regularly  received  and  deposited  in  the  special  account 
charged  to  Cash  and  credited  to  Revenue  from  Investments  which  latter 
account  is  in  turn  closed  by  transfer  of  balance  to  Sinking  Fund  for 
Redemption. 

December  31, 1919,  the  second  annual  reserve  is  made  in  the  amount  of 
$5,000,  less  the  net  income  of  the  sinking  fund  for  the  expired  current 
year  as  shown  by  the  sinking  fund  books,  and  a  corresponding  deposit  is 
made  in  the  special  fund,  while  the  proper  entries  of  the  receipt  thereof  are 
also  made  and  posted  in  the  sinking  fund  books.  March  i,  1920,  two  6% 
bonds  of  the  same  issue  as  purchased  in  the  previous  year  are  bought  for 
the  sinking  fund  at  116  and  accrued  interest,  and  one  of  the  5%  bonds  is 
sold  at  103  and  accrued  interest,  and  a  first  mortgage  for  $3,500  at  5%, 
March  i  and  September  i,  is  purchased.  The  6%  bond  bought  in  191 9 
and  held  at  1 20  is  written  down  to  1 16,  and  the  remaining  5%  bond  held  at 
par  is  written  up  to  103  by  cross-entry  between  the  principal  account  and 
the  Revenue  from  Investments  account. 

December  31,  1920,  the  third  instalment  is  reserved  and  deposited  in 
the  same  manner  and  on  the  same  principle  as  the  preceding  ones. 

Frame  the  necessary  journal  entries  on  both  the  general  and  the  sink- 
ing fund  books  to  give  expression  to  the  foregoing  transactions;  also  the 
accounts  affected  in  both  ledgers  showing  the  status  of  sinking  fund  at  the 
beginning  of  1921. 

3.  The  Phoenix  Telephone  Company  found  it  necessary  to  increase  its 
plant  to  accommodate  5,000  subscribers.  Arrangements  were  made  for 
the  necessary  additions  and  1,000  of  first  mortgage  6%  5c-year  gold  bonds 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  657 

were  issued.  A  clause  in  the  mortgage  stipulated  that  a  sum  equal  to  2% 
of  the  total  bond  issue  should  be  set  aside  annually  out  of  the  profits  of  the 
company  for  the  redemption  of  such  bonds.  The  average  annual  cost  of 
maintaining  and  operating  was  found  to  be  $27.50  per  telephone,  and 
$30,000  was  estimated  for  other  expenses.  January  i,  19 — ,4,000  tele- 
phones were  in  use  and  the  contractors  agreed  to  complete  their  work  at 
the  rate  of  250  telephones  per  quarter.  What  annual  rental  per  telephone 
would  the  company  have  to  charge  in  order  to  meet  its  obligations  and  to 
pay  a  dividend  of  5%  on  $1,000,000  of  its  stock? 

4.  The  American  Manufacturing  Company  is  incorporated  by  issue 
of  preferred  and  common  capital  stock  to  three  concerns  doing  the  same 
class  of  business.  An  examination  of  the  books  was  made  and  the 
properties  valued  by  actual  appraisement  by  a  disinterested  expert.  The 
following  is  a  summary  of  the  condition  of  each  of  the  three  plants: 

A.  Jackson  and  Smith  and 

Company  Company  Spear 

Accounts  receivable  (good) ... .          $25,000.00  $15,000.00  $50,000.00 

Stock  on  hand 25,000.00  20,000.00  10,000.00 

Plant  and  machinery 50,000.00  25,000.00  90,000.00 

Accoimts  and  bills  payable ...  .            10,000.00  20,000.00  15,000.00 

Mortgages 20,000.00          35,000.00 

Average     annual    net    profit 

5  years 10,000.00  15,000.00  8,000.00 

You  are  consulted  regarding  the  capitalization  of  the  new  company. 
How  should  this  stock  be  apportioned  to  the  three  concerns?  In  capitaliz- 
ing the  new  company  you  must  provide  $100,000  additional  preferred  and 
common  stock,  to  be  offered  for  sale  at  some  future  period.  Make  an 
equitable  distribution,  taking  into  consideration  the  value  of  the  net  assets 
and  the  good-will,  the  latter  to  be  on  the  basis  of  one-half  of  the  annual 
net  profits  for  the  last  five  years. 

V 

1.  A  company  has  acquired  machinery,  which  cost  $100,000  and  which 
it  expects  to  be  able  to  use  for  10  years.  The  scrap  value  at  the  end  of 
that  time  is  estimated  at  $25,000.  A  bond  issue  of  $75,000  due  in  10  years, 
bearing  6%  interest  and  secured  by  a  mortgage  on  the  machinery,  is 
floated  at  98  soon  after  the  purchase  of  the  machinery.  The  trust  inden- 
ture requires  that  at  the  end  of  each  year,  before  the  payment  of  dividends, 
a  sum  shall  be  set  aside  and  charged  against  earnings  sufficient  to  provide 
a  sinking  fund  on  a  5%  basis  for  the  redemption  of  the  bonds  at  maturity. 


658  APPENDIX 

The  president  of  the  company  is  in  favor  of  providing  a  reserve  for 
depreciation  on  the  machinery  by  the  sinking  fund  method,  using  5%  as  a 
basis,  although  he  does  not  advocate  creating  a  replacement  fund  for  the 
machinery  as  well  as  a  sinking  fund  for  the  bonds.  The  treasurer  con- 
tends that  it  is  not  necessary  to  provide  any  reserve  for  depreciation,  as- 
serting as  his  reason  that  the  creation  of  a  sinking  fund  reserve  and  a 
reserve  for  depreciation  would  involve  a  double  charge  against  profits  and, 
further,  that  as  the  sinking  fund  reserve  is  obligatory  the  depreciation 
reserve  is  not  required. 

(a)  Compute  the  amount  of  the  annual  contribution  to  the  sinking 
fund  for  the  redemption  of  the  bonds. 

(b)  Set  up  a  table  showing  the  accumulation  of  the  fund,  on  the 
assumption  that  it  earned  exactly  5%.  Also  indicate  the  annual  entries 
for  the  sinking  fund  and  for  the  sinking  fund  reserve. 

(c)  Give  your  opinion  as  to  whether  or  not  there  should  be  a  reserve 
for  depreciation  as  well  as  a  sinking  fund  reserve.  If  the  sinking  fund  re- 
serve is  sufficient,  what  disposition  will  eventually  be  made  of  it?  If  two 
reserves  are  necessary,  when  and  in  what  manner  will  they  be  closed  out? 

1.05'°  =  1.62889463. 

2.  What  could  a  purchaser  who  wished  to  realize  3%  on  his  investment 
give  for  a  bond  for  $10,000  which  had  four  years  to  run  at  5%  interest 
payable  yearly,  and  thereafter  was  repayable  with  a  bonus  of  io%? 

3.  In  auditing  the  books  of  a  corporation  you  find  that,  in  order  to 
provide  a  sum  to  redeem  a  mortgage  of  $100,000  falling  due  at  the  end  of 
10  years,  a  reserve  of  $8,000  per  annum  has  been  set  aside  annually  for 
three  years,  but  that,  contrary  to  intention,  the  company  has  failed  to 
accumulate  interest  thereon.  Assuming  interest  at  4%  (convertible 
annually)  what  should  have  been  the  total  accumulations  to  date,  and 
what  amount  should  now  be  set  aside  annually  for  the  next  seven  years 
in  order  to  complete  the  sinking  fund?     1.04'  =  1.31593. 

4.  A  railroad  company  has  the  following  capitalization: 

Shares 

Capital  stock  outstanding  (par  value  $100) 92,438 

Capital  stock  issued  and  in  treasury 6,439 

Capital  stock  vmissued I1I23 

100,000 

The  directors  declare  a  dividend  of  10%  payable  in  the  stock  of  the 
corporation,  and  the  resolution  authorizes  the  ofiicers  of  the  company  to 
use  the  treasury  stock  and  unissued  stock  for  that  purpose,  and  directs 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR 


659 


them  to  purchase  on  the  open  market  as  much  more  stock  as  may  be  re- 
quired for  distribution.  How  much  stock  must  be  purchased  for  this 
purpose,  so  that  when  the  distribution  is  completed  all  the  stock  shall  be 
outstanding  and  none  shall  remain  in  the  treasury?  Scrip  is  to  be  issued 
for  fractional  parts  of  a  share. 

VI 

1.  X,  Y,  and  Z,  foundry  men,  unable  to  meet  their  obligations  sus- 
pend payment  January  1, 19 — ,  and  appoint  a  trustee  to  realize  and  liqui- 


date for  the  benefit  of  their  creditors, 
and  liabilities: 

Assets 

Land  and  Buildings.  . .  $125,000.00 

Machinery  and  Tools  .  75,000.00 

Furniture  and  Fixtures  10,000.00 

Materials  and  Supplies  95,000.00 

Notes  Receivable 15,000.00 

Accounts  Receivable. . .  1 1 5 ,000 .00 

Cash 450.00 


$435,450.00 


The  books  show  the  following  assets 

Liabilities 

Mortgage  on  Foundry 

Premises $100,000.00 

Accounts  Payable 105,000.00 

Notes  Payable 135,000.00 

Interest     Accrued    on 

Mortgage 1,250.00 

Taxes  Accrued  (esti- 
mated)    835.00 

Capital 93,365.00 

1435,450.00 


The  trustee's  cash  receipts  and  payments  during  the  year  19 —  are  as 

*ollows: 

Receipts  Payments 

Notes  Receivable  (out-  Notes  Payable $  25,000.00 

standing  January  i,  Accounts  Payable 35,000.00 

19 — ) $  15,000.00      Interest  on  Mortgage, 


Accounts  Receivable 
(outstanding  January 
I,  19 — ) 106,500.00 

Cash  Sales 5,435-00 

Notes  Receivable  (con- 
tracted during  19 — ) .  13,500.00 

Accounts  Receivable 
(contracted  during 
19 — ) 212,000.00 


Total  Receipts. 


$352,435-00 


one  Year  at  5% .... 

Taxes  for  Preceding 
Year 

Purchase  of  Material 
and  Supplies 

Labor 

General  Expenses 

Interest  on  Bills  Pay- 
able to  September  30, 
19— at  5% 

Total  Payments. . . 


5,000.00 

865.00 

98,000.00 

135.000.00 

45,000.00 

2,800.00 
$346,665.00 


Other  transactions  are  as  follows: 


66o 


APPENDIX 


Sales  on  Credit 

Bad  Debts  Written  off  Accounts  Prior  to  January  i, 

19— 

Bad  Debts  Written  off  Accovmts  Subsequent  to  Janu- 
ary I,  19 — 

Discount  and  Allowances  to  Customers'  Accounts 
Prior  to  January  i ,  19 — 

Discounts  and  Allowances  to  Customers'  Accounts 
Subsequent  to  January  i,  19 — 

Notes  Received  from  Customers 

Notes  given  to  Creditors  ($1 10,000  being  renewals) .  , 

Inventory  of  Materials,  December  31,  19 — 


s,ooo.oo 


2,000.00 


$500.00 


300.00 


$335,000.00 


10,000.0c 


800.00 

20,000.00 

180,000.00 

92,000.00 


At  the  end  of  the  year  the  business  is  returned  to  the  owners. 
Prepare  realization  and  liquidation  accounts  and  balance  sheet. 

2.  The  officers  of  the  A  Company  find  they  are  unable  to  meet  current 
obligations  and  a  receiver  is  appointed  on  April  28,  19 — .  The  receiver 
calls  for  an  inventory  and  a  statement  as  at  date  of  appointment,  which  is 
given  as  follows: 

Statement  A  Company 
April  28,  19- 


Assets 

Liabilities 

Machinery  and  Equip- 

Reserve for   Deprecia- 

ment   

$507,300.00 

tion  

$    7.300.00 

Consigned  Merchandise 

220,000.00 

J.  Smith  and  Company 

250,000.00 

Merchandise  at  Mill. . . 

115,000.00 

Bank  Loans 

105,000.00 

Cash 

800.00 

Acceptances 

15,000.00 

Accotmts  Receivable.. . 

1,400.00 

Bank  Overdraft 

1,000.00 

Unexpired  Instu^ance. . . 

800.00 

City  Taxes  Accrued . . . 

4,000.00 

Employees'     Liberty 

Collateral  Notes  Pay- 

Bonds  

4,700.00 

able 

4,700.00 

Mortgage  on  Machinery 

100,000.00 

Accrued     Interest     on 

Mortgage  (to  date) . . 

3,000.00 

Lease — Machinery .... 

30,000.00 

Accrued     Interest     on 

Lease  Agreement.. . . 

10,000.00 

Accounts  Payable 

110,000.00 

Capital    Stoc  k — 

Common 

100,000,00 

Capital    Stoc  k — 

Preferred 

100,000.00 

Surplus 

10,000.00 

$850,000.00 

$850,000.00 

PRACTICE  WORK  FOR  SECOND  HALF-YEAR  66l 

On  November  20,  the  receiver  having  disposed  of  all  assets  for  cash 
(except  consigned  merchandise,  and  $400  accounts  receivable  which  were 
considered  doubtful)  calls  upon  you  to  prepare  an  interim  statement  for 
the  information  of  the  stockholders  and  creditors. 

He  leaves  the  form  to  your  judgment  but  suggests  that  it  be  as  concise 
as  possible  and  that  you  show  his  valuations  as  well  as  book  value,  at  date 
of  receivership.  He  also  wants  a  summary  of  his  transactions,  not  neces- 
sarily to  include  profit  or  loss  showing,  and  finally  wants  the  statement  to 
show  conditions  as  they  are  at  date  you  are  called  in. 

You  find  that  the  collateral  notes  payable  were  for  accommodation  of 
employees  and  were  secured  by  deposit  of  bonds,  also  the  property  of  em- 
ployees, as  per  statement.  The  bonds  have  now  been  delivered  to  the 
employees  and  the  notes  paid  by  them. 

The  court  has  authorized  payments  of  the  city  taxes  and  accrued  in- 
terest of  $400,  which  latter  amount  had  been  omitted  from  the  statement 
but  included  by  receiver  in  his  valuation  statement.  Federal  taxes  were 
also  found  to  be  due  and  were  also  paid  (amount  $1,000). 

The  lease  covered  machinery  worth  $30,000,  but  the  firm  that  fur- 
nished this  machinery  has  accepted  a  release  of  the  A  Company's  equity 
in  this  machinery  as  full  payment  of  notes  under  lease  agreement  and  the 
accrued  interest. 

The  receiver  finds  that  J.  Smith  and  Company's  account  represents 
advances  on  the  entire  consigned  merchandise  and  that  this  merchan- 
dise has  been  pledged  to  secure  this  claim  in  part  (to  the  extent  of 
value  of  the  merchandise).  Receiver  accepts  book  value  for  purpose  of 
his  records. 

After  removal  of  the  leased  machinery  the  remaining  machines  and 
equipment  were  sold  for  $200,000  and  the  mortgage  (and  accrued  interest 
to  date  of  payment  $5,000)  was  paid  in  full.  (Receiver's  original  value 
placed  upon  all  machinery  was  $200,000.) 

The  merchandise  at  the  mill  was  valued  by  the  receiver  at  $75,000,  but 
after  6  months'  operation  the  amount  on  hand  was  sold  without  inventory 
for  $25,000. 

The  accounts  receivable  were  valued  by  the  receiver  at  $1,000  and  the 
amount  was  in  fact  realized  in  cash,  the  balance  appearing  doubtful. 

Unexpired  insurance  is  accepted  by  receiver  at  book  value.  November 
10  a  rebate  of  $100  was  received  and  all  policies  were  canceled. 

Upon  comparing  the  statement  with  the  books  you  find  accounts  pay- 
able understated  $10,000  in  the  statement  given  receiver  because  of  an 
error  on  the  part  of  a  bookkeeper  when  closing  books  at  April  28. 

Claims  were  duly  filed  for  entire  amount  owing  (except  $10,000  ac- 


662  APPENDIX 

counts  payable).  An  account  in  purchase  ledger  was  disallowed  and  is  in 
dispute  (amount  $5,000). 

The  receiver  sold  merchandise  to  the  amount  of  $75,000,  all  of  which 
had  been  paid  for.  Other  receipts  were  rent  for  portion  of  building — 
sublet — $1,000;  unclaimed  wages  $500;  interest  on  bank  account  to  No- 
vember 20, 19—,  $200;  cash  surrender  value  of  insurance  policy  on  life  of 
treasurer  $1,000. 

Other  payments  were:  receiver's  accounts  payable  $50,000;  taxes 
$3,000  (assessed  since  receivership);  rent  $2,000;  legal  expenses  $5,000. 
No  fee  has  been  allowed  receiver  or  will  be  considered  in  your  statement. 

An  analysis  of  the  ledger  determines  the  fact  that  only  the  following 
bills  and  expense  vouchers  had  been  carried  through  the  invoice  register 
since  receivership,  and  all  had  been  paid  promptly,  viz.:  labor  $20,000; 
materials  $20,000;  shop  expense  $3,000;  heat  and  power  $2,000;  freight 
$1,000;  general  expense  $4,000. 

vn 

1.  The  trial  balance  of  the  Occidental  Timber  Company  on  January  i, 

19—,  was  as  follows: 

Cash $    2,618.03 

Accounts  Receivable 21,111.17 

Inventory 36,133.32 

Unexpired  Insurance 55944 

Plant  and  Equipment 352,109.75 

Timber  and  Lands 551.539-31 

Preferred  Claims $  37,01 1 .99 

First  Mortgage  Bonds,  6% 212,500.00 

Bond  Interest  Accrued — 6  months 6,375.00 

Unsecured  Creditors 64,471 .64 

Capital  Stock 400,000.00 

Surplus 243,712.39 

|.,07i.02     $964,071.02 


The  company  being  unable  to  meet  its  current  obligations,  the  Western 
Trust  Company  was  appointed  receiver  on  January  i,  19 — . 

The  transactions  under  the  receivership  for  the  year  following  are 
hereby  summarized: 

Purchased  Logs  (half  was  bought  for  cash,  less  cash  discounts, 

and  the  balance  on  credit) $    9,646.22 

Operating  Expenses 202,972.81 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  663 

Commissions 4,214.14 

Demurrage 326.00 

Freight  Inward 585.53 

General  Expense 4,837.40 

Salaries 1 2,000.00 

Shipping  Expense 13, 574- 10 

Taxes 1,421.00 

All  paid  in  cash. 

Allowance  for  stumpage  cut  amounting  to  $50,000  was  credited  to 
Timber  account.  Interest  on  bonds  to  December  31,  19 — ,  was  paid  in 
full  and  the  outstanding  bonds  were  reduced  to  $200,000,  December  31, 
19 — ,  by  paying  oflf  $12,500  at  loi.  Sales  amounted  to  $450,000  gross,  of 
which  $300,000  was  received  in  cash  as  net  payment  by  customers. 

Freight  Allowance  to  Customers $70,510.00 

Discounts  Allowed 556.33 

Discounts  Received 500.00 

Profit  from  Commissary 5,000.00 

Stmdry  Income 3,500.00 

The  accounts  receivable  of  January  i ,  1 9 — ,  realized  $20,000  net.  Pre- 
ferred claims  were  paid  in  full.  Depreciation  of  $3,500  was  allowed  on 
plant  and  equipment.  Unexpired  insurance  on  December  31,  19 — , 
amounted  to  $125.     Inventories  were  $40,000. 

Prepare  Realization  and  Liquidation  account,  Cash  account,  and  bal- 
ance sheet,  December  31, 19 — ,  also  the  receiver's  Profit  and  Loss  account, 
proving  the  gain  shown  by  the  Realization  and  Liquidation  account  and 
showing  all  the  elements  making  up  the  net  amount. 

2.  A,  B,  C,  and  D  have  decided  to  dissolve  partnership.  To  that  end 
they  have  liquidated  all  their  liabilities,  and  at  the  date  of  the  first  division 
of  cash  among  the  partners  the  conditions  are  as  follows: 

Profit  and 
Partners  Capitals  Loans  Loss  Ratio 

A        $22,000.00      $  7,000.00  40% 

B        19,000.00  6,000.00  30 

C       12,000.00        14,000.00  20 

D       7,000.00        13,000.00  10 

Totals $60,000.00      $40,000.00  100% 


Cash  available  for  distribution $  20,000.00 

Other  assets  not  yet  realized  (of  doubtful  value) 80,000.00 

$100,000.00 


664  APPENDIX 

State  which  partners  should  participate  in  the  distribution  of  the 
$20,000,  how  much  cash  each  should  receive,  whether  the  payments 
should  be  applied  against  the  capital  accounts  or  the  loan  accounts.  Ex- 
plain the  procedure  of  determining  the  distribution.  Assume  that  none 
of  the  partners  has  any  private  property. 

3.  The  Blank  firm  is  engaged  in  the  lumber  business  owning  timber 
lands  in  fee  and  licensed,  sawmills,  and  other  equipment,  and  90%  of  the 
stock  in  another  lumber  corporation.  They  instruct  an  accountant  to 
examine  their  accounts  for  the  purpose  of  ascertaining  the  true  financial 
position.  The  following  is  a  trial  balance  from  the  firm's  books  on 
December  31,  1921,  after  closing: 

Cash $     20,000,00 

Accounts  Receivable 150,000.00 

Logs  and  Manufactured  Lumber 200,000.00 

Advances   on   Account   of   Season's    Logging 

Operations 100,000.00 

Investments    in    Controlled    Company    (900 

shares — cost) 99,000.00 

Timber  Lands  (cost) 500,000.00 

Mill  Plants  and  Equipment  (cost) 250,000.00 

Loans  Payable $    150,000.00 

Accounts  Payable 250,000.00 

Deposits  on  Order 50,000.00 

Mortgage  on  Plants 150,000.00 

Controlled  Company  Current  Account 20,000.00 

Partners'  Capital 739,000.00 

$1,339,000-00     $1,339,000,00 


The  controlled  company's  trial  balance  on  December  31,  1921,  is: 

Cash $    5,000.00 

Accounts  Receivable 70,000.00 

Logs  and  Manufactured  Lumber 40,000.00 

Timber  Lands 50,000.00 

Mills 100,000.00 

Bills  Payable $100,000.00 

Blank  Firm 30,000.00 

Accounts  Payable 20,000.00 

Capital 100,000.00 

Surplus 15,000.00 

$265,000.00  $265,000.00 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  665 

The  following  matters  disclosed  by  the  accountant's  examination  are 
not  included  in  the  accounts  prior  to  closing  December  31,  1921.  The 
appraised  value  of  the  timber  lands  of  the  firm,  consisting  of  200  square 
miles,  and  those  of  the  controlled  company,  consisting  of  20  square  miles, 
is  $3 ,000  per  square  mile.  The  owners  wish  these  taken  up  in  the  accounts. 
There  are  unpaid  license  fees  on  the  timber  lands  of  the  firm  due  in  1927  of 
$8  per  square  mile,  which  must  be  paid  to  retain  the  privilege  of  cutting 
the  timber  under  the  stumpage  agreement.  Of  the  bills  payable  of  the  con- 
trolled company  $50,000  are  indorsed  by  the  firm.  The  latter  has  also 
discounted  customers'  notes  amounting  to  $25,000.  The  difference  in 
the  intercompany  accounts  consists  of  a  charge  by  the  firm  to  advances 
on  logging  operations  instead  of  to  the  controlled  company.  There  are 
prepaid  taxes  in  the  controlled  company  of  $2,000.  The  stock  on  hand  of 
logs  and  lumber  are  pledged  as  security  for  loans  of  $100,000. 

Prepare: 

(a)  Adjusting  entries  for  above. 

(b)  Corrected  trial  balances. 

(c)  Consolidated  balance  sheet. 

(d)  Write  a  brief  report  covering  the  examination  and  balance  sheet. 

vin 

1.  A  and  B  are  in  partnership  as  commodity  brokers,  A  receiving  55% 
of  the  profits  and  B  45%.  In  order  to  strengthen  the  financial  statements 
of  the  firm  they  agreed  some  years  ago  to  turn  in  as  partnership  assets 
certain  securities  held  by  them  as  individuals.  Under  a  separate  agree- 
ment, dividends  on  these  securities  as  well  as  profits  or  losses  from  sales 
were  to  accrue  to  each  as  though  separate  ownership  were  retained.  In 
addition  the  partnership  as  such  has  purchased  securities  which  it  holds  as 
investments  in  the  same  companies. 

You  are  furnished  a  trial  balance  of  the  general  ledger  before  closing, 
which  shows  the  following  condition  at  December  31,  19 — : 

Debits  Credits 

Cash  and  Other  Current  Assets $320,000.00 

Securities : 

Firm $  50,000.00 

A 100,000.00 

B 50,000.00      200,000.00 

Office  Fiuniture  and  Fixtures 15,000.00 

Deferred  Charges  to  Profit  and  Loss 3,000.00 


666 


APPENDIX 


Expense  Accounts , , 

Accounts  Payable 

Notes  Payable 

Capital  Accounts: 

A 

B 

Commissions  and  Other  Earnings  (including  divi- 
dends on  stocks  held  by  firm) 

Dividends  Received  for  Personal  Accounts: 

A 

B 


Debits 

Credits 

40,000.00 

$  55.864.00 

150,000.00 

223,500.00 

75,000.00 

70,000.00 

2,000.00 

1,636.00 

$578,000.00 

$578,000.00 

A  statement  is  also  handed  to  you  of  the  securities  held,  divided  be- 
tween firm  purchases  and  partners'  individual  holdings  above  mentioned 
as  follows: 


Individual  Holdings 
Book  Value 
Shares      Price       Amount 
X  Company...       1,280  50      $64,000.00 

Y  Company.  .  .         300        120  36,000.00 

$100,000.00 


Partnership  Holdings 
Book  Value 
Shares      Price       Amount 
200  50       $10,000.00 

175  100         17,500.00 

$27,500.00 


Shares 

X  Company 1,480  55 

Y  Company 475  140 


Total 

Value  December  31,  19 — 
Price  Amount 


$  81,400.00 

66,500.00 

$147,900.00 


B 

Individual  Holdings 
Book  Value 
Shares     Price       Amotmt 

X  Company 600  50        $30,000.00 

Y  Company 200  100  20,000.00 

$50,000.00 


Partnership  Holdings 
Book  Value 
Shares     Price       Amount 
164  50       $  8,200.00 

143  100         14,300.00 

$22,500.00 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  667 

Total 

Value  December  31,19— 
Shares         Price  Amount 

X  Company 764  55  $42,020.00 

Y  Company 343  140  48,020.00 

$90,040.00 


You  are  requested  by  the  partners: 

(a)  To  prepare  a  balance  sheet  showing  the  actual  status  of  each 

partner's  investment  in  the  business  at  December  31,  19 — , 
giving  effect  to  the  appraised  value  of  securities  at  that  date 
(as  indicated  by  the  total  column  in  the  above  table). 

(b)  To  submit  a  scheme  of  capital  stock  distribution  between  A  and 

B,  for  use  if  the  partnership  should  be  converted  into  a  corpora- 
tion, each  partner  turning  in  his  individual  security  holdings  to 
such  corporation. 

Interest  has  been  credited  on  capital  accounts  at  6  %  during  the  year 
(to  A  $12,600,  to  B  $4,250)  and  such  interest  has  been  included  among  the 
expenses. 

2.  A  company  with  head  office  in  Chicago  and  factory  at  South  Bend, 
Ind.,  conducts  three  selling  branches  in  New  York,  San  Francisco,  and 
Montreal,  which  are  supplied  with  goods  from  the  factory,  the  invoices 
being  sent  out  from  the  head  office. 

The  branches  keep  their  own  sales  ledgers,  send  out  monthly  state- 
ments to  customers,  and  receive  cash  against  their  ledger  accounts,  which 
they  remit  weekly  to  Chicago. 

All  branch  expenses,  including  salaries  and  wages,  are  paid  by  the 
branches  from  petty  cash  accounts,  kept  at  a  fixed  balance  of  $500,  by 
draft  on  head  office. 

The  following  information  is  supplied  by  the  branches  at  December 
31,  19 — ,  summarizing  the  transactions  of  the  previous  six  months: 

New  York 

Rent  and  Taxes  Paid $      200.00 

Sales  for  6  months  to  Decem- 
ber 31,  19 — 12,500.00 

Salaries  and  Wages 1,650.00 

Returned  Sales 200.00 

Allowances  to  Customers . . .  50.00 

Bad  Debts 

Cash  Sales 6,250.00 


San  Francisco 

Montreal 

$      175.00 

$       75-00 

11,800.00 

10,225.00 

1,520.00 

1,600.00 

100.00 

250.00 

40.00 

30.00 

125.00 

60.00 

5,380.00 

6,100.00 

668  APPENDIX 

New  York  San  Francisco  Montreal 
Cash     Received     from 

Customers  on  Ledger  Ac- 

coimts 10,850.00  10,260.00  9,150.00 

Debtors,  July  i,  19 — 5,820.00  6,140.00  7,240.00 

Debtors,  December  31,  19 —  7,220.00  7,415.00  7.975-00 

Petty  Cash,  July  i,  19 — .  .  .  500.00  500.00  500.00 
Petty  Cash,    December  31, 

19 — 500.00  500.00  500.00 

Stock,  July  I,  19 — 3,450.00  3,820.00  3,650.00 

Stock,  December  31,  19 — . ..  4,300.00  4,720.00  4,500.00 
Goods  Received  from  Head 

Office  and  Factory 1 1,500.00  10,240.00  10,350.00 

Required : 

(a)  Branch  accounts  on  head  office  books. 

(b)  Final  general  trial  balance. 

(c)  Branch  Profit  and  Loss  accounts. 

3.  It  is  now  becoming  quite  common  practice  for  corporations  to  in- 
sure the  lives  of  their  principal  officers,  so  that  upon  their  deaths  the  cor- 
porations may  be,  in  a  measure,  reimbursed  for  the  loss  to  the  business. 
You  are  asked  to  indicate  what  sort  of  entries  would  be  made  by  a 
company,  from  time  to  time,  if  it  paid  the  insurance  premivjms  on  a  policy 
of  insurance  for  $50,000  carried  on  the  life  of  its  president  under  the  four 
classes  of  insurance  policies  indicated  below: 

lo-year  renewable  term  policy. 
20-payment  life  policy. 
Straight  life  policy. 
20-year  endowment  policy. 

Also  indicate  what  entries  should  be  made  in  the  books  for  the  receipt 
of  the  $50,000  principal  of  the  different  classes  of  policies,  supposing  the 
president  of  the  company  died  during  the  fifth  year  of  the  insured  term. 

IX 

1.  A  company  packs  a  coupon  in  each  box  of  goods  sold.  The  com- 
pany agrees  to  redeem  100  coupons  with  premiums  costing  $1  apiece. 
25%  of  the  coupons  are  never  presented  for  redemption. 

Prepare  sample  journal  entries  for  the  bookkeepers  to  follow  which 
will  give  the  last  of  each  month  the  expense  for  the  month  for  coupons 
given  out,  the  amount  of  premiums  on  hand,  and  the  gross  and  net  lia- 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  669 

bility  for  outstanding  coupons,  and  state  briefly  how  these  entries  will 
produce  the  result  wanted. 

2.  A  trading  stamp  company  sells  its  stamps  for  $5  per  thousand.  It 
redeems  these  stamps  in  cash  for  $4  per  thousand  or  in  premiums  of  which 
the  average  cost  is  $4.50  per  thousand.  The  income  on  the  investments  is 
$8,748  per  year.  It  estimates  that  5%  of  the  stamps  sold  will  lapse  and 
never  be  redeemed.  It  anticipates  the  profit  to  be  at  the  rate  of  10%  on 
the  balance  of  stamps  sold  after  deducting  the  redemptions  and  estimated 
lapses. 

The  trial  balance  of  January  31,  19 — ,  is  as  follows: 

Debits  Credits 

Balances  January  31,  19 — : 

Cash $  23,510.00 

Stamps  on  Hand,  at  Cost 1,525.00 

Investments  in  Bonds 152,825.00 

Good- Will 100,000.00 

Premiums,  at  Cost 38,710.00 

Capital $100,000.00 

Accounts  Payable 6,010.00 

Balances  January  31,  19 —  (which  have  not 
changed  during  the  month  and  are  to  be 
adjusted  by  the  January  operations) : 

Accrued  Interest 2,475.00 

Lapses 76,388.00 

Anticipated  Profits 23,577.00 

Unredeemed  Stamps 312,158.00 

Surplus 8,717.00 

Balances  January  31,  19 —  (showing  operations 
for  January) : 

9,600,000  stamps  redeemed  in  January  in  pre- 
miums          43,200.00 

4,9 1 2,500  stamps  redeemed  in  January  in  cash. . .  19,650.00 

Stamps  sold  in  January 65,000.00 

Expenses,  January 10,525.00 

Coupons  Collected  in  January 500.00 

Totals 1492,385.00    $492,385.00 


Submit  an  operating  account  and  Profit  and  Loss  account  for  the 
month  of  January  and  a  balance  sheet  as  at  January  31,  19 — . 

3.  In  a  certain  department  of  a  large  dry  goods  house  the  purchases 
for  a  year  were  $30,000.  They  were  in  the  first  place  marked  up  for 
"selling"  purposes  to  $45,000.    Later  additional  mark-ups  amounting  to 


670  APPENDIX 

$2,000  were  made  and  mark-downs  were  also  recorded  aggregating  $5,000. 
At  the  end  of  the  fiscal  period  there  were  found  to  be  on  hand  goods  of  the 
marked  selling  value  of  $10,000.  State  how  you  would  arrive  at  their 
inventory  value  for  the  purpose  of  closing  the  books  and  calculate  the 
amount.     Explain  fully. 

4.  Highland  County  undertakes  two  public  improvements,  viz.:  a 
road  estimated  to  cost  $50,000,  and  a  sewer  estimated  to  cost  $40,000. 

The  work  is  to  be  paid  for  out  of  proceeds  from  the  sale  of  county 
bonds,  falling  due  at  various  dates  and  redeemable  from  assessments, 
levied  against  property  presumably  benefited,  to  the  amount  of  the  actual 
cost  of  the  work  and  incidental  charges  when  these  are  determined. 

Bonds  to  the  above  amounts  are  accordingly  sold,  realizing  a  premium 
of  1%,  which  is  added  to  the  respective  funds;  the  cost  of  the  two  under- 
takings when  completed  is  $50,000  and  $40,500  respectively,  for  which 
assessments  are  accordingly  levied. 

Assessments  are  subsequently  collected  as  follows:  For  roads  $30,200, 
with  accrued  interest  of  $1,310;  for  sewers  $29,400,  with  accrued  interest 
of  $1,250.     The  interest  in  each  case  goes  into  the  related  funds. 

Road  bonds  of  the  par  value  of  $20,000  and  sewer  bonds  of  the  par 
value  of  $15,000  mature  and  are  redeemed. 

Frame  journal  entries,  post  to  ledger  accounts,  and  prepare  a  trial 
balance  from  which  the  status  of  the  county  debt  and  of  the  funds  and 
assessments  at  the  conclusion  of  the  above  transactions  can  be  ascertained 
and  determined. 

X 

1.  In  January  15,  1906,  Howard  Robinson  and  four  others  acquired  a 
tract  of  600  acres  at  a  cost  of  $20,000.  On  March  i,  1906,  they  incor- 
porate the  Nob  Hill  Realty  Company  for  the  purpose  of  acquiring. 
subdividing,  and  selling  this  tract  for  residence  purposes. 

The  par  value  of  the  stock  is  $100  per  share,  the  capital  $300,000,  ol 
which  $120,000  is  issued  for  the  land  purchased,  and  the  balance  $180,000 
is  paid  for  in  cash.  The  directors  engage  a  landscape  architect  to  lay  ou' 
the  tract,  a  special  feature  of  which  is  to  be  a  beautiful  park,  together 
with  tree-lined  boulevards  and  driveways.  In  accordance  with  the  arch- 
itect's advice  the  directors  defer  marketing  any  portion  of  the  property 
until  the  year  1916. 

Owing  to  errors  in  early  development  work  the  company  is  compelled 
to  borrow  $50,000  at  6%  on  March  i,  1915.     The  loan  is  secured  by  a 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  671 

mortgage  on  the  entire  property,  with  the  customary  release  clause  for 
individual  lots  upon  payment  of  $25,000  of  the  loan,  and  $1,000  on  each 
lot  for  which  release  is  demanded. 

Sales  of  lots  are  made  beginning  March  i,  191 6. 

The  sale  contract  provides  that  the  company  will  maintain  the  park 
and  driveways  in  perpetuity,  and  to  insure  this  a  fund  will  be  created  for 
the  permanent  maintenance  and  care  of  the  park  and  driveways,  the 
estimated  annual  expense  of  which  is  $6,000.  It  is  agreed  with  pur- 
chasers of  lots  that  one-third  of  all  cash  received  from  sales  shall  be  in- 
vested in  sound  bonds  yielding  4%  net,  until  $150,000  has  been  so  in- 
vested. It  is  further  agreed  that  upon  the  sale  of  all  the  lots,  the  bonds 
will  be  turned  over  to  a  board  of  trustees  to  be  elected  by  lot-owners  and 
designated  trustees  of  Nob  Hill  Park,  who  shall  take  over  the  management 
of  the  park  and  driveways.  In  November,  1921,  Robinson  dies  and  as  a 
result  of  the  inquiries  made  by  the  accountant  for  the  executor,  the  follow- 
ing facts  appear  with  respect  to  the  financial  affairs  and  accounts  of  the 
Nob  Hill  Realty  Company : 

It  has  been  the  practice  of  the  directors  to  buy  bonds  after  the  close 
of  each  fiscal  year.  The  books  are  in  balance,  but  the  total  cost  of  the 
investment  is  not  recorded  and  no  entries  appear  with  respect  to  the 
park  fund  for  permanent  maintenance  from  which  the  bonds  were  to  be 
purchased. 

The  tract  consists  of  400  lots  of  different  sizes,  but  all  of  the  same 
selling  price.  On  February  28,  1922,  40  lots  are  left  unsold,  sales  of  which 
will  probably  be  consummated  during  the  spring  and  summer  of  1922. 

Cash  dividends  have  been  declared  and  paid,  but  nobody  appears  to 
know  what  portion  of  dividends  was  earned,  and  what  portion  represents 
liquidating  dividends,  if  any.  The  accountant  draws  off  two  trial  balances, 
as  follows: 

Trial  Balances 

March  i,  19 16  February  28,  1922 
Debits: 

Cash  on  Hand $  16,000.00  $   252,000.00 

Bonds 100,000.00 

Real  Estate 120,000.00  120,000.00 

Improvements 160,000.00  160,000.00 

Improvements  Replaced 60,000.00  60,000.00 

General  Expense 24,000.00  84,000.00 

Park  and  Driveway  Maintenance          36,000.00 

Dividends  Paid 430,000.00 

$380,000.00  $1,242,000.00 


672  APPENDIX 

March  i,  1916  February  28,  1922 
Credits: 

Capital  Stock $300,000.00  $    300,000.00 

Sale  of  Lots 900,000.00 

Bond  Interest 12,000.00 

Interest  (on  call  loans) 30,000.00  30,000.00 

Mortgage 50,000.00  

$380,000.00  $1,242,000.00 


From  the  foregoing  data  prepare  journal  entries,  Profit  and  Loss  ac- 
count for  the  period,  and  balance  sheet  as  of  February  28,  1922. 

2.  On  January  i  the  Fairview  Real  Estate  Association  was  incorpo- 
rated, the  capital  subscribed  and  paid  in  being  $30,000,  divided  into  30 
shares.  The  association  purchased  improved  property  for  speculative  pur- 
poses, paying  cash  $30,000  and  giving  a  first  mortgage  for  $60,000  at  6%. 

The  association  organizes  and  incorporates  on  the  same  day  the  Fair- 
view  Club  with  30  proprietary  members  (being  the  stockholders  of  the  real 
estate  association)  and  30  associate  members,  who  have  no  proprietary 
interest  but  enjoy  all  the  privileges  without  incurring  all  the  liabilities. 
The  annual  fees  are  $100  a  year,  paid  by  all  in  advance. 

The  association  leases  to  the  club  the  property  aforesaid,  the  considera- 
tion being,  in  lieu  of  rent,  the  payment  by  the  club  of  all  sums  for  taxes, 
betterments,  interest,  fixtures,  furniture,  etc. 

The  proprietary  members  are  assessed  $300  each  and  by  a  subsequent 
resolution  of  the  association  are  to  receive  credit  therefor  with  interest  at 
6%.    Five  members  fail  to  pay  the  assessment. 

The  association  having  executed  a  contract  for  the  sale  of  the  property 
for  $1 10,000,  the  club  disbands  at  the  end  of  the  year. 

The  club  expenditures  for  the  year  are  as  follows:  taxes  $1,800;  inter- 
est on  mortgage  $3,600;  repairs  $1,000;  improvements  $3,000;  furniture 
and  fixtures  $2,000;  general  expenses  $500;  help  (sundry  employees) 
$1,600. 

There  are  house  charges  against  the  members  $500  in  amount,  which 
arc  subsequently  collected;  and  there  are  payable  book  debts  of  $4,000. 
A  second  assessment  of  $100,  called  for  to  pay  off  the  club  debts,  is  paid  by 
the  proprietary  members  of  the  association. 

Frame  journal  entries,  raise  and  close  accounts  on  the  association  and 
the  club  books,  and  prepare  balance  sheet  and  revenue  account  for  each. 

3.  The  Fairview  Cemetery  Association,  a  corporation,  has  as  one  of  its 

by-laws  the  provision  that  "  the  sum  of  $2,500  shall  be  paid  out  of  the  gross 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  673 

profits,  annually,  to  the  Guaranty  Trust  Company,  Trustee,  for  the  pur- 
pose of  creating  an  endowment  fund,  the  income  from  which  is  to  be  used 
for  the  perpetual  care  of  the  cemetery,  after  the  company  shall  cease  to 
exist;  and  further  that  in  the  year  1968  said  endowment  fund  shall  be  paid 
over  to  the  city,  with  the  provision  that  the  income  thereof  shall  be  used 
in  maintaining  the  cemetery  as  a  park." 

In  accordance  with  the  above,  the  Fairview  Cemetery  Association  pays 
over  to  the  Guaranty  Trust  Company,  on  December  31,  1920,  the  sum  of 
$2,500. 

June  30,  1 92 1,  is  the  end  of  the  first  fiscal  year  of  the  association,  and 
the  books  are  to  be  closed  as  of  that  date.  The  trial  balance  of  their  books 
is  as  follows : 

Debits 

Land $  80,000.00 

Accounts  Receivable 4,260.00 

Cash  in  Office  and  Banks 12,759.60 

Upkeep  of  Cemetery 16,540.00 

Office  Expenses 1,950.00 

Improvements 23,150.00 

Lots  in  Other  Cemeteries 440.40 

Endowment  Fund  (referred  to  above) 2,500.00 

Total $141,600.00 

Credits 

Capital  Stock $100,000.00 

Sales  of  Lots 32,450.00 

Notes  Payable 5,000.00 

Accounts  Payable 1,450.00 

Income  from  Interments 2,140.00 

Miscellaneous  Income 560.00 

Total $141,600.00 


It  is  stated  that  under  our  statute,  sale  of  lots  can  be  treated  as  "prof- 
its" and  the  company  avails  itself  of  this  in  closing  their  books. 

Under  date  of  June  30,  192 1,  the  Guaranty  Trust  Company  makes  the 
following  report  as  to  the  endowment: 

1.  That  they  have  received  the  $2,500. 

2.  That  on  January  15,  192 1,  they  have  purchased  two  $1,000  bonds 

at  par  and  accrued  interest.    Rate  of  interest  is  5%,  payable 
June  and  November  of  each  year. 

3.  That  they  have  collected  $50  interest  on  June  i,  1921. 

VOL.  Ill — 43 


674  APPENDIX 

4.  That  they  have  allowed  3%  interest  per  annum,  computed  semi- 
annually, on  lowest  amount  of  cash  in  fund  during  period. 

They  show  the  cash  in  fund,  which  you  are  asked  to  compute  from  the 
above  to  verify  the  correctness  of  their  balance. 

(a)  Make  necessary  journal  entries  to  close  the  books  for  the  fiscal  year. 

(b)  Construct  income  and  expense  accounts  for  the  year. 

(c)  Construct  balance  sheet  as  on  June  30,  1921. 

(d)  Prepare  such  accounts  as  in  your  opinion  are  necessary  to  show  the 
full  status  of  the  endowment  fund,  to  be  kept  on  the  books  of  the  association . 

4.  As  on  January  i,  1907,  a  corporation  is  formed  for  the  purpose  of 
acquiring  and  conducting  a  cemetery,  and  starts  business  on  that  date 
with  a  capital  stock  of  $100,000  paid  for  in  cash.  The  company  first  pur- 
chases 40  acres  of  land  within  easy  access  of  a  large  city,  paying  for  same 
at  the  rate  of  $1,000  per  acre.  It  proceeds  to  expend  considerable  sums 
of  money  in  the  purchase  and  planting  of  trees  and  shrubs,  laying  out 
drives  and  pathways,  sodding,  building  of  glass  houses,  etc.  The  f)olicy  of 
the  company  is  to  withhold  the  selling  of  burial  lots  until  after  January  i, 
191 7,  so  as  to  allow  the  trees  and  shrubs  to  become  more  fully  grown  and 
in  the  expectation  that  with  the  growth  of  the  city  their  property  will  be- 
come more  valuable.  In  the  year  191 7  the  company  commences  selling 
burial  lots,  and  all  lots  are  sold  under  a  special  provision  whereby  the 
company  agrees  to  apply  50%  of  all  cash  received  on  sales  in  the  purchase 
of  4%  bonds  until  a  total  of  $150,000  of  such  bonds  shall  have  been  so  pur- 
chased. The  agreement  further  provides  that  after  all  the  lots  have  been 
sold  the  company  will  wind  up  its  affairs  and  the  above  bonds,  amounting 
to  $150,000,  shall  be  given  to  the  city,  which  shall  use  the  income  of  such 
bonds  for  keeping  up  the  cemetery.  It  is  the  custom  of  the  company  not  to 
purchase  bonds  until  after  the  close  of  each  fiscal  year,  and  after  the  total 
sales  of  that  year  have  been  determined. 

March,  1922,  the  directors  of  the  company  find  that,  while  they  believe 
the  books  to  be  in  balance,  no  proper  entries  have  been  recorded  showing 
the  total  cost  of  their  investment,  and  that  no  entries  have  been  made  with 
respect  to  the  fund  of  $150,000  from  which  said  bonds  are  to  be  purchased. 
While  cash  dividends  have  been  declared  and  paid,  the  directors  are  in 
ignorance  of  what  their  profits  actually  have  been,  and  how  much  of  the 
dividends  so  received  have  been  out  of  their  profits  and  how  much  in  the 
nature  of  liquidating  dividends,  representing  a  return  of  their  original 
investment.  They  therefore  employ  a  certified  public  accountant  to  deter- 
mine all  these  matters  and  to  make  the  necessary  entries  on  their  books  and 
render  a  report  to  them.    After  determining  the  clerical  accuracy  of  the 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR 


675 


books  the  accountant  draws  off  the  two  trial  balances  given  below,  and  from 
them  prepares  the  necessary  entries  and  obtains  the  information  required 
by  the  directors. 

Trial  Balance 

Debits 

January  i,  19 17  January  i,  1922 

Real  Estate $  40,000.00  $  40,000.00 

Improvements 45,000.00  45,000.00 

Bonds 125,000.00 

Administration  Expense 20,000.00  46,000.00 

Upkeep  of  Cemetery 45,000.00 

Dividends  paid 130,000.00 

Cash 7,000.00  40,800.00 

$112,000.00  $471,800.00 

Credits 
Interest  account  representing  interest 

at  4%  on  unexpended  cash  during 

development  period $  12,000.00  $  12,000.00 

Bond  interest  account 9,800.00 

Sale  of  lots 350,000.00 

Capital  Stock 100,000.00  100,000.00 

$112,000.00  $471,800.00 


An  inventory  of  their  unsold  lots  as  on  January  i,  1922,  shows  that 
they  have  10  acres  left  unsold  of  equally  desirable  character  with  that  al- 
ready sold.  Draw  up  entries,  prepare  Profit  and  Loss  account  for  period 
and  balance  sheet  as  on  January  r,  1922,  in  same  manner  as  if  you  had 
been  the  accountant  engaged.  In  any  interest  calculation  use  4  %  simple 
interest. 

XI 

1.  By  the  terms  of  a  sinking  fund  agreement  the  Southwestern  Trust 
Company  as  trustee  of  the  bond  issue  collects  from  the  Susquehanna  Rail- 
way Company,  semiannually,  on  the  first  day  of  January  and  July,  the 
interest  on  the  bonds  in  the  sinking  fund,  together  with  the  sinking  fund 
payment. 

If  it  cannot  purchase  sufficient  bonds  at  par  and  accrued  interest  in  the 
open  market  to  absorb  the  moneys  in  the  sinking  fund,  it  draws  sufficient 
bonds  by  lot,  10  days  prior  to  February  i  and  August  i  of  each  year  at  par 
flat  so  as  to  invest  all  of  the  moneys  in  its  hands. 


676  APPENDIX 

The  interest  on  these  drawn  bonds  ceases  to  the  public  on  the  first 
coupon  date  after  they  are  drawn. 

The  bonds  are  held  alive  in  the  sinking  fund  and  interest  on  them  is 
collected  by  the  trustee  and  is  used  with  the  semiannual  sinking  fund  pay- 
ments to  retire  additional  bonds. 

The  first  statement  of  account  is  that  rendered  by  the  trustee  to  the 
assistant  treasurer  of  the  railway  company,  who  checks  it  up  and  renders 
the  second  statement  of  account  to  the  treasurer  of  the  railway  company  to 
be  taken  into  the  accounts. 

Reconcile  the  two  statements  of  account,  which  are  as  follows: 

Susquehanna  Railway  Company 

In  Account  With 

The  Southwestern  Trust  Company,  Trustee,  imder  Sinking 

Fimd  Agreement  dated  January  i,  1886,  for  Northern 

Division  4%  Bonds  maturing  1936 

Debit 
1921 
Jan.   15  Bought    $10,000    Northern    Division    4% 

bonds  at  99  1/2 $9,950.00 

Accrued  Interest 182.22     $  10,132.22 

2b  Paid  $100  drawn  bond  and  coupon 102.00 

Feb.     I  Paid  $95,100  drawn  bonds  and  coupons 95,202.00 

2  Paid  $10,000  drawn  bonds 10,000.00 

4  Paid  $2,200  drawn  bonds  and  coupons 2,202.00 

5  Paid  Balance 12,796.06 

$130,434.28 

Credit 
1920 

Dec.  31  Balance  as  per  account  rendered $    3,540,28 

1921 

Jan.     I  Received  semiannual  payment  to  the  sinking  fimd 40,000.00 

I  Collected  6  months'  interest  to  February  1,1921,  on 

$4,329,500  Northern  Division  4%  bonds 86,590.00 

27  Collected  coupon  paid  with  drawn  bond 2.00 

Feb.     I  Collected  6  months'  interest  to  date  on  $10,000  North- 
em  Division  4%  bonds  purchased  in  January 200,00 

3  Collected  coupons  paid  with  drawn  bonds 102.00 

$130,434.28 

Feb.     5  Balance $  12,796,06 

Bonds  drawn  but  not  yet  presented  for  payment: 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  677 

No.  0286  for  $1,000  and  Nos.  016,  0288,  0354  for  $100  each,  on 
which  interest  ceased  February  i,  1920. 

Nos.  0259,  0456  for  $1,000  each,  and  No.  07  for  $100,  on  which  inter- 
est ceased  August  i,  1920. 

Nos.  038,096,0102,0157, 0966, 0988,01655, 04299, 04300,  for  $1,000 
each,  and  Nos.  015,  019,  026,  0100,  for  $100  each,  on  which 
interest  ceased  February  i,  1921. 

The  Southwestern  Trust  Company,  Trustee,  under  Sinking 

Ftmd  Agreement  dated  January  i,  1886,  for  Northern 

Division  4%  Bonds  mattuing  1936 

In  Accotmt  With 

Susquehanna  Railway  Company 

Debit 
1920 

Dec.  31  Balance  as  per  accotmt  rendered $         66.28 

192 1 

Jan.     I  Paid  semiannual  payment  to  sinking  fimd 40,000.00 

I  6  months'  interest  to  February  i,  192 1,  on  $4,332,900 

Northern  Division  4%  bonds 86,658.00 

Feb.     I  Paid  6  months'  interest  to  date  on  bonds  purchased  in 

January 200.00 

$126,924.28 
Feb.    5  Balance $92.06 

Credit 
192 1 
Jan.   15  Bought    $10,000    Northern    Division    4% 

bonds  at  99  1/2 $9,950.00 

Accrued  Interest 182.22    $  10,132.22 

Feb.     I  $116,700  Northern  Division  bonds  drawn  for  payment 

this  day  at  par 1 16,700.00 

5  Balance 92.06 

$126,924.28 

Sinking  Fimd  Bonds 
$4,459,600  Northern  Division  4%  Bonds 

2.  The  books  of  the  X  Manufacturing  Company  were  audited  to 
December  31,  1920,  and  in  making  up  the  balance  sheet  and  the  profit  and 
loss  account  at  that  date  the  auditors  recommended  the  following  adjust- 
ments: 


678 


APPENDIX 


1.  Transferred  to  Profit  and  Loss,  $4,231.07,  which  had  been  charge- 

to  real  estate  and  buildings  in  error. 

2.  Provided  for  depreciation  of  buildings,  etc.,  $7,200. 

3.  Adjusted  salaries  amounting  to  $1,400,  due  for  1920  services  bui 

not  entered  on  the  books  until  January,  192 1. 

4.  Reduced  the  amount  of  inventory  because  of  errors,  $12,000. 

The  same  auditors  were  again  called  in  to  audit  the  books  to  June  30, 
192 1,  and  found  that  the  above  adjustments  had  not  been  entered  in  the 
books.  They  also  found  that  during  the  half-year  $  i  ,000  had  been  charged 
to  real  estate,  buildings,  etc.,  instead  of  to  expense;  that  no  provision  had 
been  made  for  depreciation  for  the  period,  amounting  to  $3,600,  and  that 
the  inventory  had  been  footed  $10,000  too  much.  Also  that  the  unexpired 
insurance  amounted  to  $750  more  than  was  entered  on  the  books. 

The  following  are  condensed  trial  balances  of  the  X  Manufacturing 
Company  books  as  the  auditor  found  them  as  of  December  31,  1920,  and 
June  30,  1921: 


Real  Estate,  Buildings,  etc. 

Capital  Stock 

Debentures 

Cash , 

Accounts  Payable 

Accounts  Receivable 

Loans 

Stocks  and  Bonds 

Inventory 

Unexpired  Insurance 

Surplus 

Profit  and  Loss,  1921 


December  31,  1920 


$102,840.26 


14,672.14 
22,436.10 


17,502.50 

246,153.42 

1,471-23 


$405,075-65 


$200,000.00 
100,000.00 


9.431-17 
10,000.00 


85,644.48 


$405,075.65 


June  30,  192 1 


$115,226.80 


22,143.21 
28,250.40 


19,150.00 

288,360.14 

742.26 


$473,872.81 


5200,000.00 
100,000.00 


11,698.21 
5,000.00 


85,644.48 
71.530.12 


$473,872.81 


From  the  above  facts  prepare: 

(a)  A  correct  balance  sheet,  June  30,  192 1. 

(b)  State  the  adjusted  amount  of  profits  for  the  half-year  to  June  30, 

1921. 

(c)  Prepare  statement  reconciling  the  balance  sheet  figures  with  the 

original  trial  balance  of  June  30,  1921. 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  679 

3.  The  condition  of  the  Atlantic  Company  at  the  close  of  business 
December  31,  19 — ,  is  reported  by  them  as  follows: 

Assets 

Real  Estate $    150,000.00 

Machinery 200,000.00 

Cash 24,500.40 

Accounts  Receivable 320,800.50 

Merchandise 375,480.70 

$1,070,781.60 

Liabilities 

Capital  Stock $    500,000.00 

Mortgage  on  Real  Estate 100,000.00 

Accounts  Payable 67,000.00 

Surplus 200,000.00 

Notes  Payable 100,000.00 

Profit  and  Loss 103,781.60 

$1,070,781.60 

The  company  has  a  branch  to  which  it  sells  its  goods  at  20%  over 
inventory  prices,  and  carries  this  account  together  with  other  branch 
assets  as  a  receivable. 

The  statement  of  the  branch  on  the  date,  December  31,  19 — ,  was: 

Assets 

Fixtiires $  6,205.79 

Cash 1,107.55 

Accounts  Receivable 12,478.14 

Merchandise  at  price  billed  to  branch 5,241.95 

$25,033.43 

Liabilities 
Atlantic  Company $25,033.43 

(a)  What  was  the  inventoried  value  of  the  branch  merchandise? 

(b)  Prepare  a  corrected  statement  of  the  Atlantic  Company. 

xn 

1.  A,  the  party  of  the  first  part,  enters  March  i  on  the  performance  of 
a  contract  for  $50,000,  payable  in  two  instalments  of  $25,000  each,  the 
first  of  which  is  due  on  completion  of  a  specific  part  of  the  work  but  sub- 
ject to  10%  being  retained  by  the  party  of  the  second  part  as  security  for 
the  continuation  of  the  undertaking;  the  second  instalment,  together  witt 


680 


APPENDIX 


the  security  retained  as  aforesaid,  is  to  be  paid  on  final  acceptance  of  the 
completed  work. 

A  has  a  capital  of  $4,000  available  for  payment  of  labor,  which  proves 
insufficient.  He  therefore  takes  in  as  associates,  on  AprU  i,  B,  who  con- 
tributes $3,000  and  C,who  contributes  $1,000.  B  and  C  are  to  share  profits 
in  the  proportions  of  ^  and  }/§  respectively,  and  to  receive  interest  on 
capital  at  6%  per  annum. 

The  first  instalment  on  the  contract  falls  due  and  is  paid  on  May  i, 
at  which  date  $7,502  has  been  expended  by  the  contractors  for  labor  and 
incidentals,  and  obligations  for  materials  and  supplies  furnished  on  credit 
have  been  incurred  and  are  outstanding  to  the  amount  of  $13,900,  of 
which  all  but  $1,500  are  forthwith  settled  from  the  instalment  money. 

On  receipt  of  the  first  instalment,  B  and  C  withdraw  their  capital  and 
realize  the  profits  earned  at  the  completion  of  the  first  stage  of  the  work, 
leaving  A  to  continue  alone,  it  being  carefully  estimated  and  mutually 
conceded  that  a  further  outlay  of  $26,158  will  be  sufficient  to  finish  the 
work  and  cover  all  reasonable  contingencies. 

Show  by  skeleton  ledger  accounts  the  cash  payable  by  A  to  B  and  C 
respectively  on  their  withdrawal  from  the  partnership,  and  state  the 
resources  and  obligations  that  remain  to  A  on  entering  on  the  second  part 
of  the  work. 


2. 

Trial  Balance  of  the 

Cash 

Furniture  and  Fixtures 
Real  Estate  (Rutherford 

Home) 

Investments  in  Stocks .  . 
Investments  in  Bonds .  . 
Missouri  Pacific  Margin 

Account 

Accounts  Receivable .  .  . 

General  Expense 

Interest 


General  Ledger  of  John  Doe,  Civil  Engineer 

At  December  31,  19 — 
$10,572.44       Manhattan     Construc- 

1 ,054.68  tion $  5,000.00 

Report  #  I ,  Swanee  Creek 

6,000.00  Railroad 5,300.00 

15.457-50       Report  #2,   Englewood 

3,000.00  Reservoir 4,500.00 

Report  #3,    Long  Acre 

13,000.00  Library 3,200.00 

15.361.32       Connecticut    Tramways 

9,800.00  Company  i 1,950.00 

1,060.00       Earnings — Consulting.  .         2,000.00 

Report  Fees 16,000.00 

Sharp     and     Company 

Brokers 11,310.00 

Stocks  and  Bonds 4,300.00 

Capital 21,745.94 

$75,305-94  $75,305-94 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  68 1 

Analyses 

General  Expense:  Salaries:  John  Doe  $6,000,  other  salaries  $1,800! 
rent  $1,000;  advertising  $600;  cables  and  telegrams  $90;  stationery  and 
printing  $110;  other  expenses  $200. 

Interest:  Debited  with  $1,300  charged  by  Sharp  and  Company, 
brokers,  on  margin  account;  reduced  by  dividends  of  $390,  credited  by 
Sharp  and  Company  on  margin  account.    Balance  on  loans  since  repaid. 

Manhattan  Construction  Company:  Represents  consulting  fees  re- 
ceived during  the  year  19 — ,  the  contract  running  from  month  to  month, 
with  no  expense  to  John  Doe. 

Reports  1-3:  Are  completed  and  delivered.  Account  contains  fees 
less  expenses. 

Connecticut  Tramways  Company:  Represents  $2,000  received 
November  i,  19 — ,  and  expenses  of  $50;  according  to  terms  of  contract 
John  Doe  is  to  act  as  consulting  engineer  for  10  months  and  to  receive 
altogether  $5,000. 

Report  Fees:  Fees  received  under  contract  for  report,  of  which  $9,000 
has  been  received  on  contracts  on  which  no  work  has  been  done;  balance 
is  earned. 

Stocks  and  Bonds:    Are  sold.    Account  represents  balance. 

Additional  Facts:  Dividends  on  stocks  received  during  the  year 
amount  to  $1,985, of  which  $1,000  has  been  applied  to  the  account, Invest- 
ment Stocks,  and  $985  to  Stock  and  Bonds  Sold. 

Prepare : 

(a)  Balance  sheet  at  December  31,  19 — ,  with  your  certificate  at- 

tached. 

(b)  Income  statement  showing  John  Doe's  true  earning  power  as  a 

civil  engineer. 

3.  A  corporation  with  a  balance  sheet  as  at  December  31,  192 1,  given 
below,  is  placed  in  charge  of  a  receiver. 

Assets  Liabilities 

Cash $  12,188.00       Accounts  Payable $  62,060.00 

Accounts  Receivable. . .  71,227.00        Notes  Payable 60,000.00 

Investments 13,950.00       Capital  Stock 50,000.00 

Fixtures 46,880.00       Surplus 55.497-00 

Inventory 83,312.00 


$227,557.00  $227,557.00 


An  examination  of  the  books  discloses  the  following:  The  cash  consists 
of  deposit  in  bank  $10,550;  currency  $595 ;  advanced  on  traveling  expenses 
$250;  sundry  expense  vouchers  $793. 


C82  APPENDIX 

Accounts  receivable  are  as  follows: 

Contracted  in  192 1 $5i;822,  estimated  to  shrink  $500 

"1920 5.715.  "  "       "     25% 

"1919 3.180,  "  "       "     75% 

"         prior  to  1919 10,510,  all  bad 

The  investments  are  considered  to  be  of  no  value.    The  inventories  are 
found  to  contain  unsalable  stock  to  the  amount  of  $7,525. 
The  fixtures  have  been  bought  as  follows: 

In  1914 $  5.115-00 

1915 3,002.00     ■ 

1916 2,150.00 

1917 17,810.00 

191 8 1,005.00 

1919 4.50500 

1920 6,115.00 

1921 7,178.00 

$46,880.00 

Fixtures  are  estimated  to  last  10  years,  and  no  depreciation  has  been 
entered  in  the  accounts.  Bills  for  goods  received  amounting  to  $3,512 
have  not  been  included  in  the  accounts  payable  of  $62,060. 

The  receiver  decides  to  reorganize  the  business  with  a  capital  stock  of 
$150,000,  divided  as  follows:  $75,000  common,  and  $75,000  6%  preferred. 
He  oflFcrs  the  creditors  75%  of  their  claims  in  preferred  and  25%  in  com- 
mon stock,  with  a  bonus  of  25%  common.  This  is  accepted  by  creditors 
holding  $60,000  worth  of  notes,  and  $40,000  of  claims  on  open  accounts. 
He  offers  the  stockholders  in  the  old  corporation  one  share  of  common 
stock  in  the  new  corporation  for  every  two  shares  in  the  old  corporation. 
This  is  accepted  by  all  of  them.  He  estimates  that  the  new  corporation 
can  do  a  business  of  $700,000  a  year  with  the  goods  costing  70%,  that  his 
expenses  will  be  $175,000,  that  he  will  allow  X%  for  bad  bills  and  a  de- 
preciation charge  of  10%  on  the  cost  of  fixtures. 

Submit  an  adjusted  balance  sheet  of  the  new  corporation,  and  an  es- 
timated operating  account  for  the  first  year,  showing  the  estimated  per- 
centage to  be  earned  on  the  common  stock,  after  paying  dividends  on  the 
preferred. 

XIII 

1.  The  books  of  a  manufacturing  concern,  operating  under  a  system  of 
cost  accounts,  show  the  following  conditions  at  the  opening  of  the  fiscal 
year:     Raw  materials  in  storeroom  $15,621.42;  factory  pay-roll,  applied 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  683 

and  distributed  but  not  paid,  2  days,  $831.78;  partly  manufactured  goods, 
at  prime  cost  $63,888.44,  and  the  further  value  of  $8,037.17  to  cover  fac- 
tory burden;  also  $12,074.92  to  cover  management  charges;  finished  wares 
in  stock  at  total  cost  of  $21,656.01. 

The  financial  operations  during  the  ensuing  year  include:  purchases  of 
raw  materials  $80,416.45;  factory  pay-rolls  $125,793.90;  factory  expense, 
including  wages  not  applied  to  cost  accounts,  $24,846;  management  ex- 
penses $38,100;  interest  paid  on  loans  $1,200;  income  from  investments 
$5,004. 

The  manufacturing  operations  during  the  same  year  comprehend  raw 
materials  issued  on  requisition  for  consumption  $79,820.34;  wages  applied 
and  distributed  to  manufacturing  cost  $1 20,250.40,  and  to  factory  expenses 
$5,959.39  included  in  the  sum  stated  in  preceding  paragraph. 

Finished  goods  transferred  from  factory  to  warerooms,  at  prime  cost, 
covering  materials  $78,542.58  and  labor  $118,333.75.  The  trading  opera- 
tions during  the  same  year  comprehend:  cost  of  goods  sold  $251,949.90; 
proceeds  from  goods  sold  $302,339.88. 

At  the  close  of  the  year  the  partly  completed  goods  include  in  addition 
to  prime  cost  the  further  elements  of  value  to  cover  factory  and  manage- 
ment expenses  in  the  amounts  respectively  of  $8,439.02  and  $12,678.66, 
and  factory  pay-roll  for  3  days  amounting  to  $1,247.67,  which  has  been 
applied  and  distributed  though  not  due  till  the  close  of  the  current  week. 

The  basis  of  the  apportionment  of  overhead  charges  is  as  follows: 
factory  expense,  20%  to  materials  and  80%  to  labor;  management 
expenses,  30%  to  materials  and  70%  to  labor. 

The  transactions  of  the  previous  year  in  round  amounts  are  used  in 
calculating  the  current  year's  apportionment,  viz.,  materials  $75,000; 
labor  $115,000;  factory  expense  $24,000;  management  expense  $36,000. 

Open  the  general  ledger  accounts  that  control  the  cost  accounts;  show 
the  operation  of  each  and  the  resulting  net  profits;  also  calculate  the  per- 
centage to  be  added  to  each  $1  of  material  and  of  labor  to  give  the  total 
cost. 

2.  The  cost  books  of  factory  A,  the  product  of  which  is  charged  to  the 
main  office  of  the  X  Y  Z  Company,  at  factory  cost,  show  the  following  facts 
January  i,  19 — . 

Cash  (imprest  fund)  $500;  raw  materials  $17,688.51 ;  wages  unpaid  and 
distributed  $2,348.67;  goods  in  process,  at  prime  cost,  $62,258.61,  plus 
$11,352.75  for  general  expenses  and  $9,007.50  for  management  charges; 
finished  goods  $45,290.20. 

The  invoices  for  purchases  of  raw  materials  for  the  year  amount  to 
$78,375.65;  wages  paid  are  $133,041.27;  management  charges  $53,695, 


684 


APPENDIX 


factory  expenses  $36,967.08.  The  cash  receipts  for  one  year's  rent  of  loft 
are  $  1 ,  200,  and  f  or  1 1  months'  sale  of  power  $330,  the  twelfth  month  being 
unpaid. 

The  raw  materials  consumed  during  the  period  amount  to  $64,188.33; 
management  charges  distributed,  to  $55,7^1.90;  factory  expenses  distrib- 
uted to  costs,  to  $43,033.23.  There  is  also  a  loss  on  machinery  replace- 
ments of  $107.50. 

The  finished  product  output  for  the  year  amounts  to  $324,583.43, 
including  all  costs;  and  the  transfers  to  the  main  office  are  $338,297.90. 

At  the  close  of  the  period,  December  31, 19 — ,  there  remains  unpaid  and 
undistributed  to  goods  in  process  the  regular  factory  pay-roll  for  3  days 
amounting  to  $2,857.93  and  also  1,500  hours  of  operatives'  overtime  at  an 
average  rate  of  45  cents  per  hour,  payable  on  a  basis  of  2]/^  hours  overtime 
as  the  equivalent  of  2,%  hours  regular  time. 

Raise  all  the  ledger  accounts  affected  and  show  final  trial  balance. 

3.  A  contracts  with  a  textile  establishment  to  sell  the  mill's  annual 
output  on  the  following  conditions: 

The  mill  is  to  bill  the  output  to  A  at  cost.  A  is  to  finance  the  mill  to 
the  extent  of  75%  of  cost  on  receipt  of  goods.  The  balance  is  to  be  re- 
mitted by  A  as  the  various  shipments  are  sold,  less  5%  and  advances.  At 
the  end  of  the  year  an  analysis  of  A's  affairs  reveals  the  following,  as  shown 
by  his  books,  the  goods  being  sold  at  10%  profit  above  factory  cost  (mill 
shipments  $7,327,918.18): 

Debits  Credits 

Mill  Advances %  5,545,938.00    %  5,000,000.00 

Mill  Sales 6,400,000.00  7,840,710.00 

Freight  and  Cartage 90,000.00  80,000.00 

Customers 7,840,710.00  7,632,200.00 

Cash 7,610,200.00  5,635,938.00 

Discounts 22,000.00 

Commission 320,000.00 

Mill  Account 1,000,000.00 

$27,508,848.00    $27,508,848.00 


Prepare  A's  financial  statement. 

4.  You  have  been  engaged  to  audit  the  books  and  accounts  of  the  X 
Corporation  for  the  calendar  year  19 — .  The  factory  and  other  accounting 
records  are  at  J  ;  the  secretarial  records  are  at  K.  The  company's  product 
is  made  to  order  only. 

As  a  result  of  your  audit  at  J  you  have  prepared  the  following: 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  685 

Condensed  Profit  and  Loss  Statement 

For  the  Calendar  Year  19 — 

Gross  sales  (shipments) $240,000.00 

Less:  Return  sales  and  allowances 5,000.00 

Net  sales $235,000.00 

Deduct:  Cost  of  goods  sold  (shipped) 153,300.00 

Gross  profit  on  sales $  81,700.00 

Deduct:  Selling  and  administrative  expense 32,675.00 

Net  profit  on  operations $  49,025.00 

Add:  Net  financial  income 975-00 

Net  profit  for  calendar  year  19 — $  50,000.00 


Before  the  final  preparation  of  your  report  you  go  to  K  to  examine  the 
minutes  of  the  board  of  directors.  Upon  your  examination  you  find  in  the 
minutes,  under  date  of  March  12,  19 — ,  the  following: 

Whereas,  Mr.  A,  our  factory  superintendent,  and  Mr.  B,  our 
general  sales  manager,  are  devoting  their  entire  time  and  atten- 
tion to  the  affairs  of  the  company  and  by  their  faithful  devotion 
to  its  interests  have  increased  the  output  of  the  company  at  the 
factory  and  the  sales  at  K ;  and 

Whereas,  for  this  reason  it  is  the  sense  of  the  directors  that  the 
said  Mr.  A  and  Mr.  B,  in  addition  to  the  amount  of  compensa- 
tion regularly  allowed  them,  should  be  further  compensated; 

Therefore  be  it  resolved  that  fifty  (50)  per  cent  of  the  net 
operating  profits  of  the  X  Company  (after  charging  this  addi- 
tional compensation  as  an  expense)  arising  from  the  net  ship- 
ments over  and  above  one  hundred  and  seventy-five  thousand 
dollars  ($175,000)  be  divided  equally  between  the  said  Mr.  A  and 
Mr.  B  as  their  additional  compensation  for  the  year. 

Recast  your  profit  and  loss  statement  to  give  eflfect  to  the  above  addi- 
tional information. 

Show  your  procedure  and  give  proof  of  your  correctness. 


XIV 

1.  Following  are  the  trial  balances  of  Company  A  and  its  subsidiaries 
at  December  31,  1920: 


686 


APPENDIX 


Debits 
Company  A 

Cash $     75,000.00 

Accounts  Receivable 350,000.00 

Notes  Receivable 200,000.00 

Inventory,     Raw     Material, 

January  i,  1920 150,000.00 

Purchases,  Raw  Materials ....  650,000.00 

Labor 450,000.00 

Manufacturing  Expenses 190,000.00 

Selling  Expenses 85,000.00 

Administrative  Expenses 45,000.00 

Inventory,  Goods  in  Process, 

January  i,  1920 80,000.00 

Inventory,     Finished    Goods 

January  i,  1920 90,000,00 

Plant  and  Equipment 900,000.00 

Investment  in  Stock  of  Com- 
pany B 875,000.00 

Investment  in  Stock  of  Com- 
pany C 1 ,200,000.00 


Company  B  Company  C 

$     50,000.00  $     60,000.00 

190,000.00  420,000.00 

60,000.00  40,000.00 


105,000.00 
400,000.00 
320,000.00 
190,000.00 
40,000.00 
25,000.00 

70,000.00 

65,000.00 
400,000.00 


160,000.00 
510,000.00 
370,000.00 
205,000.00 
75,000.00 
35,000.00 

75,000.00 

80,000.00 
750,000.00 


$5,340,000.00    $1,915,000.00    $2,780,000.00 


Credits 

Capital  Stock $3,000,000.00  $    500,000.00  $   800,000.00 

Notes  Payable 110,000.00  80,000.00  60,000.00 

Accounts  Payable 100,000.00  65,000.00  250,000.00 

Bonds  Payable 500,000.00  

Premium  on  Bonds 5,000.00     

Reserve  for  Depreciation 100,000.00  60,000.00  112,500.00 

Sales 1,400,000.00  1,050,000.00  1,250,000.00 

Surplus 125,000.00  160,000.00  307,500.00 

$5,340,000.00  $1,915,000.00  $2,780,000.00 


The  inventories  at  December  31,  1920,  were: 

Company  A       Company  B  Company  C 

Raw  Material $280,000.00        $175,000.00  $210,000.00 

Goods  in  Process 95,000.00            80,000.00  85,000.00 

Finished  Goods 135,000.00          145,000.00  105,000.00 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  687 

Company  A  purchased  the  entire  stock  issues  of  Companies  B  and  C 
at  January  i,  1920,  at  the  prices  shown  in  the  trial  balance.  During  the 
year  each  of  the  three  companies  declared  and  paid  a  5%  dividend.  Com- 
pany A  took  up  its  dividends  from  Companies  B  and  C  by  credits  to  sur- 
plus. The  various  entries  for  the  dividends  were  the  only  entries  affecting 
the  surplus  accounts  during  the  year. 

At  December  31,  1919,  Company  A's  inventory  of  raw  material  in- 
cluded goods  purchased  from  Company  B  at  a  price  of  $60,000,  the  cost 
thereof  to  Company  B  being  $40,000. 

At  the  same  date  Company  B's  inventory  of  raw  material  included 
goods  purchased  from  Company  C  for  $75,000  on  which  Company  C  made 
a  profit  of  $25,000. 

During  1920,  Company  C  sold  goods  to  Company  B  at  a  price  of 
$200,000.  These  goods  cost  Company  C  $160,000.  Company  B  still  owes 
$30,000  on  these  purchases,  the  indebtedness  being  included  in  the  ac- 
counts payable. 

During  1920,  Company  B  sold  goods  to  Company  A  at  a  cost  of  $300,- 
000  and  at  a  selling  price  of  $375,000.  Company  A  made  cash  advances 
totaling  $400,000  to  Company  B  during  the  year.  The  sales  just  men- 
tioned were  charged  against  the  Advances  account,  the  $25,000  balance  of 
which  is  included  in  Company  B's  accounts  payable. 

The  inventories  at  December  31,  1920,  include  intercompany  profits 
as  follows: 

Raw  Goods  Finished 

Material  in  Process  Goods 

Company  A $20,000.00  $5,000.00  $4,000.00 

Company  B 30,000.00         6,000.00  5,000.00 

Company  A's  bonds  were  issued  July  i,  1920.  They  bear  5%  interest, 
which  is  payable  semiannually  and  they  mature  in  5  years.  No  interest 
has  been  paid. 

Allow  depreciation  at  5%  per  annum  on  the  cost  of  the  fixed  assets. 

Prepare  the  following  consolidated  statements: 

(a)  Cost  of  goods  manufactured  and  sold. 

(b)  Profit  and  loss  statement. 

(c)  Surplus  statement  (showing  as  the  final  balance  therein  the  sur- 

plus balance  appearing  in  the  consolidated  balance  sheet). 

(d)  Balance  sheet. 

2.  The  balance  sheets  of  companies  A,  B,  and  C  are  as  follows: 


688 


APPENDIX 


Property  Leases  and 
Good- Will 

Fixtures 

Merchandise    Inven- 
tory   

Sundry  Debtors 

Sinking  Fund  Assets . 

Cash  on  Hand 


Balance  Sheet  of  A 

Capital  Stock $    400,000.00 

470,133.00      Bonds 100,000.00 

81,791.00      Sundry  Creditors. .  .  .  59.97,S-oo 

Surplus 135,886.00 

126,538.00      Pension  Fund 5,460.00 

54,642.00      Sinking  Fund 11,690.00 

1 1,690.00      Profit  and  Loss 51,987.00 

20,204.00 

764,998.00  $    764,998.00 


Cash 

Investments : 

Short-Time  Loans 

Stock  of  A  at  par. . . 

Stock  of  C  at  par . . 

Bonds  of  Company 

A  at  par  (cost) . . 

Railroad  and  other 

bonds  at  present 

value 

Merchandise 

Sundry  Debtors 

Prepaid  Expense .... 

Good- Will  and  Trade- 
Marks  

Plant  and  Machinery. 


Balance  Sheet  of  B 

51,195.00      Preferred  Stock $    800,000.00 

Common  Stock 123,000,00 

108,000.00      Surplus 160,000,00 

100,000.00      Accounts  Payable 141,235.00 

20,000.00      Notes  Payable 4,728.00 

Profit  and  Loss 217,254,00 

50,000.00 


126,070.00 

366,437.00 

15,563.00 

12,715.00 


422,900.00 

173,337-00 

$1,446,217,00 


$1,446,217.00 


Land  and  Buildings, . 

Machinery 

Merchandise 

Office  Furniture 

Cash 

Accounts  Receivable. 

Good- Will  at  Cost... 

Bonds  of  Company  A, 

$5,000  at  Cost .... 


Balance  Sheet  of  C 

$  41,438.00  Capital  Stock 

20,577.00  Bonds 

19,610.00  Surplus 

50.00  Dividend  Declared, 

14,730,00  Accoimts  Payable. 

21,245.00  Profit  and  Loss 

81,867,00 

5,030.00 
$204,547,00 


$120,000.00 

30,675.00 

34,000.00 

1,650.00 

5,879.00 

12,343.00 


$204,547,00 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  689 

Company  D  is  organized  for  the  purpose  of  consolidating  the  three 
companies  whose  balance  sheets  are  given  above  and  which  are  engaged  in 
allied  businesses.  It  is  authorized  to  issue  $2,000,000  preferred  stock  and 
$350,000  common  stock.  It  arranges  to  buy  stock  of  the  subsidiary  com- 
panies on  the  following  terms: 

For  Each  Share  of:  Is  Offered  of 

D  Preferred  Stock:  D  Common  Stock: 

A  stock  I  share  1/2  share 

B  preferred  2  shares 

B  common  i  share 

C  stock  I  share  3/4  share 

On  these  terms  D  acquires  $290,000  of  A  stock,  all  the  preferred  stock 
and  $100,000  of  the  common  stock  of  B,  and  $100,000  of  C  stock.  The 
stock  bought  is  obtained  from  individual  holders,  the  stock  of  A  and  C 
held  by  B,  as  well  as  some  stock  held  by  non-consenting  stockholders,  not 
being  acquired.  The  remaining  preferred  stock  of  D  is  held  by  the  com- 
pany. The  rest  of  the  common  stock  authorized  is  sold  for  cash  at  par. 
The  expenses  of  organization  amount  to  $5,000  and  are  paid  in  cash. 

Of  the  accounts  receivable  held  by  C,  $20,000  are  due  from  B.  Of  the 
sundry  debtors  on  the  books  of  B,  $5,500  are  due  from  A. 

Company  D  also  issues  $500,000  bonds  which  it  sells  at  105  and  pays 
$500,000  cash  for  a  plant  which  it  buys  direct. 

Prepare  a  consolidated  balance  sheet. 

XV 

1.  From  the  following  three  trial  balances  prepare  a  consolidated  bal 
ance  sheet  as  at  December  31, 19 — ,  in  the  form  you  would  draw  it  up  for 
presentation  to  the  stockholders  of  the  parent  company  (the  Safety  Razor 
Company) ,  showing  as  separate  items  therein :  (a)  the  total  good- will  of  the 
combined  companies;  and  (b)  the  net  profits  accruing  to  the  new  corpora- 
tion, viz.,  to  the  Safety  Razor  Company. 

Safety  Razor  Company 
Trial  Balance  at  December  31,  19 — 

Debits  Credits 

Preferred  Stock $1,500,000.00 

Common  Stock 1,500,000.00 

Investments  in  Subsidiary  Companies:  4,000 
shares  of  stock  of  L.  W.  Company  and  4,000 
shares  of  stock  of  Steel  Blade  Company,  both 

of  $100  each  at  cost ■. $2,500,000.00 

VOL.  Ill — 44 


690 


APPENDIX 


Accounts  Payable 

Dividends  from  Subsidiary  Companies. 

Administration  Expenses 

L.  W.  Company  Current  Account 

Steel  Blade  Company  Advances 

Cash 

Organization  Expenses 


Debits 


,  25,000,00 
100,000.00 
150,000.00 
270,000.00 
75,000.00 

,120,000.00 


L.  W.  Company 
Trial  Balance  at  December 

Properties  and  Plant $ 

Good- Will 

Investment  in  Steel  Blade  Company:  2,000 
shares  of  a  par  value  of  $100  each,  cost 
$300,000 

/nventories 

Receivables 

Cash 

Capital  Stock  (4,000  shares) 

Accounts  Payable 

Steel  Blade  Company 

Surplus  (includes  $100,000  added  to  book  value 
of  investment  in  Steel  Blade  Company) .... 

Safety  Razor  Company 


31,  19— 
Debits 
325,000.00 
250,000.00 


400,000.00 

250,000.00 

195,000.00 

90,000.00 


Credits 
20,000.00 
100,000.00 


,120,000.00 


Credits 


$  400,000.00 
125,000.00 
175,000.00 

710,000.00 
100,000.00 

$1,510,000.00     51,510,000.00 


Steel  Blade  Comi anv 
Trial  Balance  at  December  31,  19 — 

Debits 

Good-Will $  50,000.00 

Property  and  Plant 325,000.00 

Inventories 190,000.00 

Receivables,  General 105,000.00 

L.  W.  Company 195,000.00 

Cash 10,000.00 

Capital  Stock  (6,000  shares) 

Accounts  Payable 

Safety  Razor  Company 

Surplus  or  Deficit 

$875,000.00 


Credits 


$600,000.00 

90,000.00 

150,000.00 

35,000.00 

$875,000.00 


PRACTICE  WORK  FOR  SECOND  HALF-YEAR  69 1 

In  the  preparation  of  your  consolidated  balance  sheet  be  guided  by  the 
following  assumed  facts: 

1.  That  the  Safety  Razor  Company  was  formed  on  March  28,  19 — , 

and  acquired  its  stock  ownership  in  the  two  subsidiary  com- 
panies, as  shown  on  its  trial  balance,  on  April  i,  19 — . 

2.  That  at  January  i,  19 — ,  the  L.  W.  Company  had  a  surplus  of 

$605,000  and  the  Steel  Blade  Company  a  deficit  of  $50,000. 

3.  That  no  inventory  was  taken  of  either  the  L.  W.  Company  or  the 

Steel  Blade  Company  between  January  i  and  December  31, 
19 — ,  the  business  of  the  companies  being  continued  without 
interruption  notwithstanding  the  change  in  ownership  of  the 
capital  stocks  as  indicated  above. 

4.  That  prior  to  December  31,  19 — ,  the  L.  W.  Company  declared  a 

dividend  of  $100,000  payable  to  the  parent  company,  which  was 
duly  taken  up  on  the  books  of  both  companies,  being  passed 
through  the  current  accounts  and  charged  against  the  surplus  of 
the  L.  W.  Company  prior  to  December  31, 19 — . 

5.  That  the  difiference  in  the  current  accounts  between  the  Steel 

Blade  Company  and  the  L.  W.  Company  represented  as  to 
$10,000,  merchandiac  in  transit,  and  as  to  the  remaining  $10,000, 
a  charge  for  rental  of  warehouse  for  the  last  six  months  of  19 — , 
which  had  been  credited  to  the  Rent  account  on  the  books  of  the 
Steel  Blade  Company. 

6.  That  it  was  estimated  on  reliable  authority  which  might  be  ac- 

cepted as  final,  that  from  January  i  to  March  31,  19 — ,  the  net 
profits  of  the  L.  W.  Company  amounted  to  $30,000,  while  during 
the  same  period  the  Steel  Blade  Company  lost  $15,000. 

Attach  your  consolidating  working  papers  to  the  consolidated  balance 
sheet  you  prepare. 

2.  On  January  i,  19 — ,  the  A  B  Company  owned  90%  of  the  stock  of 
the  X  Y  Company  and  80%  of  that  of  the  P  Q  Company,  two  subsidiary 
companies  which  it  thus  controlled,  and  in  fact,  actually  directed  the 
policy  and  general  administration,  the  minority  holdings  in  each  case  being 
in  the  hands  of  the  officers  and  employees  of  the  subsidiary  company  or  of 
other  interests  friendly  to  the  A  B  Company.  On  June  30,  19 — ,  the 
holdings  in  the  X  Y  Company  were  reduced  to  80%  by  the  sale  of  100 
shares  at  $200  per  share,  to  certain  employees  not  theretofore  stockholders, 
while  in  the  case  of  the  P  Q  Company,  owing  to  the  resignation  of  an  officer, 
his  holdings,  consisting  of  100  shares,  were  purchased  at  par,  the  holdings 
by  the  A  B  Company  being  thus  increased  to  90%,  so  that  on  December 


692 


APPENDIX 


31,19 — ,  the  proportion  of  holdings  in  the  two  companies  was  just  reversed. 
The  following  are  the  trial  balances  of  all  three  companies  (after  clos- 
ing) at  December  31,  19 — : 

Trial  Balances 
At  December  31,  19 — 


Particulars 

A  B  Company 

X  Y  Company 

P  0  Company 

$  85.000.00 

$  75.000.00 

Good- Will 

$100,000.00 

*i  15,000.00 

82,000.00 
132,000.00 

Stockholdings: 

In  X  Y  Company: 
800    shares    (book 
value) 

In  P  Q  Company: 

13s. 000.00 

90,000.00 

Capital  Stock: 

A  B  Company,  3,000 

1300,000.00 

X  Y  Company,  1,000 

$100,000.00 

P  Q  Company,  1,000 

125,000.00 

50,000.00 

t44,000.00 

30,000.00 
60,000.00 
45.000.00 

19 — -Profits 

Dividends     Paid     in 

30,000.00 
60,000.00 

40,000.0c 

25.000.00 

25.000.00 

35,000.00 

1519,000.00 

I5 19.000.00 

$260,000.00 

$260,000.00 

$190,000.00 

$190,000.00 

*  After  crediting   the  proceeds  of  the  100  shares  sold,  prior  to  which  the  investment  had  been 
valued  at  cost. 

t  Dividends  received  from  subsidiary  companies,  less  expenses  of  parent  company. 

Prepare  consolidated  balance  sheet,  showing: 

(a)  The  liability  to  the  minority  stockholders  in  respect  to  their 

equity. 

(b)  The  proportion  of  surplus  and  profits  appertaining  to  the  stock- 

holders of  the  A  B  Company. 

(c)  The  good-will  of  the  combined  companies. 

Assume  that  the  profits  earned  by  the  X  Y  Company  and  P  Q  Com- 
pany, respectively,  to  June  30,  19- — ;  were  exactly  50%  of  the  profits  for 
the  complete  year. 


INDEX 


Acceptances,  90-93 

liability  for,  listed  on  statement,  23 
Form,  22 

payable,  analysis  of,  38 
Accountant's    Office,    Pitblic,    423-464 
(See  also  "Public  accountant's  ofi&ce") 
Accounting  Department, 

accounts  payable  section.  6 

accounts  receivable  section,  6 

analysis  section,  S 

billing  section,  7 

branch  accounting  section,  4 

chart  of,  16 

contracting,  326 

controller,  10-17 

cost  accounting  section,  S 

executive  head  of,  2 

general  auditor,  2,  9 

general  office  accounting  section,  4 

interrelations  of  sections,  7 

organization,  1-17 

pay-roll  section,  6 

sections  of,  3 

tabulating  section,  S 
Accounts, 

classification  of ,  (See  also  "Classification 
of  accounts") 
by  auditor,  3 
Accounts  Payable, 

coal  mining,  14s 

department  for  control  of,  6 

listed  on  financial  statement,  23,  2S,  37. 
44 
Form,  22 
Accounts  Receivable, 

accrued,  coal  mining,  144 

coal  mining,  143-144 

coffee  trade,  358-360 
Form,  359 

contracting,  340-342 
Form,  341 

department  for  control  of,  6 

department  stores,  401 

foreign  exchange, 

nostrg  accounts,  72-73 


Accounts  Receivable — Continued 

hotel,  502-505 

listed  on  financial  statement,  23,  43 
Form,  24 

ratio  of,  to  sales,  34 
Accruals, 

analysis  of,  38,  44 
Acreage, 

record,  ranch  accounting,  230-231 
Additions,  Betterments,  and  Permanen: 
Improvements, 

malleable  iron  industry,  305 
Adjustment  Entries, 

hotel  accounting.  Si 6-5 17 

ranch  accounting,  250-263 
Administration  Department, 

contracting,  323-325 
Administrative  Boards, 

municipal  corporation,  525-526 
Advertising  Agency,  465-487 

advertising  rates,  473-474 

a  middleman,  468-469 

art  department,  469-470 

bookkeeping   and    auditing    department. 
470-471 

cash  book,  472-473 
Form,  472 

checking  advertisements,  476-481 

checking  card,  476-481 
Form,  478 

checking  department,  471 

closing  the  books,  483-484 

contract  sheet,  476-481 
Form,  480 

copy  schedule,  483 
Form,  482 
for  monthly  publications,  483 
Form,  484-485 

cost  of  job,  474-476 

customers'  invoices,  481-483 

departmentization,  469-472 

development,  465-466 

duties,  466-468 

export  department,  471-472 

filing  department,  471 

forwarding  department,  470 

functions,  466-468 


693 


694 


INDEX 


Advertising  Agency — Continued 
glossary  of  terms  used,  484-487 
inception,  465 

invoices  to  customers,  481-483 
journal  entries,  476 
ledgers,  481 

Form,  482 
mechanical  department,  470 
newspaper  accounts  payable,  481 
order  form,  476-481 

Forms,  476,  477 
organization,  465-466 

chart,  467 
placing  advertisements,  476-481 
plan  and  copy  department,  469 
preparation  of  advertisement,  474-476 
printing  department,  470 
promotion  department,  470 
publishers  ledger,  481 

Form,  482 
rate  file,  473-474 

rates  and  statistical  department,  470 
recording  department,  472 
requisition  job  order,  474-476 

Forms,  474,  475 
sales  records,  472-473 
service  rendered,  468-469 

fiDVERTISING  RaTES, 

advertising  agency,  473-474 
Affiliated  Companies, 

amounts  due  to,  analysis  of,  38,  44 
Agency  Advertising,   465-487    (For   full 

entries,  see  "Advertising  agency") 
Agriculture  (See  "Ranch  accounting") 
Alteration  Departments, 

department  stores,  41 1-4 12 
Amortization, 

bonds,  savings  bank,  11 7-1 18 

development  costs,  coal  mining,  169-173 
illustrations,  171,  172 

schedules     book,     savings     bank,     116- 
117 
Analysis  Section, 

functions,  S 
Annealing  Department, 

malleable  iron  industry,  284-28S,  291 
Arbitrage, 

foreign  exchange,  54 
accounts,  85-86 
Architect's  Certificate, 

contracting,  338 
Form,  339 
Arrival  Sheet, 

hotel  accounting,  493-494 
Art  Department, 

advertising  agency,  469-470 


Assays, 

current,  metal  mining,  220 
ores,  metal  mining,  205-206 
Assets, 
capital, 

ranch  accounting,  240-242 
classification  of,  on  financial  statements, 

19 
current, 

as  collateral  on  financial  statement,  36 

nature  of,  35 

on  financial  statements,   19 

ranch  accounting,  t64-26s 

ratio  to  current  liabilities,  33 

use  of  ratios  in  appraising,  34 
department  store,  416 
fixed, 

listed  on  comparison  sheet,  39 

listed  on  financial  statements,  19 

ranch  accounting,  265-267 
malleable  iron  industry,  306 
municipal  accounting,  562,  566,  572,  573, 

574.  575,  576 
ranch  accounting,  264-267 
Auditor, 

certificates,    public    accountant's    office, 

444-445 
general,  2 

duties  of,  2,  9 
Audits, 

public  accountant's  office,  424 

program,  438-439 

Form,  440-441 

savings  bank,  125-126 

aim  of,  126 

kinds,  126 
Authorization  Sheets, 
foreign  exchange. 

Form,  66 


B 


Balance  Sheet, 

classification  of  assets  on,  19 
coal  mining,  1 40-1 51 
department  stores,  415-417 
foreign  exchange,  58-59 
included  in  financial  statement,  19 
malleable  iron  industry,  306-307 
metal  mining,  208-210 
mining. 

Form,  224-225 
municipal  accounting,  562—566,  572-575 
ranch  accounting,  264-268 
savings  bank,  121-123,  127,  131 


INDEX 


695 


Bank  (See  also  "Savings  bank") 

certificate,  public  accountant's  office,  443 

checks,  foreign  exchange,  74 

comparison  sheets  for  financial  statement, 
27-30 
Form,  28-29,  31-32 

methods  of  loaning  money,  30-33 
Bessemer  Process, 

malleable  iron  industry,  276,  281-282 
Billing  Section, 

functions  of,  7 
Bills  of  Exchange, 

for  financing  purchases,  coffee  trade,  347- 
348 

foreign  exchange,  discounting,  95 
Bituminous    Coal    Mining    (See    "Coal 

mining") 
Blacksmith  Shop, 

malleable  iron  industry,  283-284,  292 
Board  and  Lodging, 

of  employees,  hotel  accounting,  S14-SIS 

ranch  accounting,  255 
Bond, 

amortization,  117— 118 

record, 

municipal  accounting,  551 

Form, SS0-S5I 
savings  bank,  114-116 
Bonded  Debts,  27 
Bookkeeping  and  Auditing  Department, 

advertising  agency,  470-471 
Books  of  Original  Entry, 

foreign  exchange,  49-7S 

municipal  accounting,  5Si~SS3 
Bought  Sheet, 

coffee  trade,  368-370 
Form,  369 
Branches, 

department  for  controlling,  4 

public  accountant's  office,  446-447 
Branches  of  Accounting, 

public  accountant's  office,  424-425 
Brokers, 

coffee  trade,  356-357 
Budgets, 

control  by  controller,  12 

municipal,  529-531,  562,  567,  572-575 
accounting  treatment,  543,  564,  569 
estimates  for,  530-531 
procedure  for,  530 
statements,  581 
Building  Contracting  Procedure,  317- 

318 
PuiLDiNGS  (See  "Real  estate") 
Burden  (See  "Overhead") 
Buying  (See  "Purchases") 


By-Product  Sales, 
hotel  accounting,  516 


Cables,  64-73 
Capital  (See  also  "Assets") 
account, 

on  financial  statement,  40 

municipal  accounting,   535,   540,   543- 
S4S 
department  store,  417 
expenditures,  distinction  from  operating 

expenditures,  coal  mining,  177 
fund,  municipal  accounting,  573 

statement  of  financial  position,  573 
ranch  accounting,  268 
stock,  listed  on  financial  statements,  21 
working,  determining  sufficient,  34 
Carpenter  Shop, 

malleable  iron  industry,  292 
Cash, 

account,  coal  mining,  144 
balances,  listed  on  financial  statements. 
23.  43 

Form,  22 
determining  sufficient  on  hand,  34 
disbursements, 

department  stores,  401-402 
metal  mining,  222 

discounts,  department  stores,  414-4x5 
forms,  municipal  accounting,  556 
handling,  hotel  accounting,  S05-508 
receipts, 

department  stores,  401-402 

metal  mining,  222 
record, 

advertising  agency,  472-473 
Form,  472 

contracting,  340 

department  stores,  401-402 

hotel  accounting,  505-508 

municipal  accounting,  551-553 

ranch  accounting,  229 

savings  bank,  118-121 
Castings, 

malleable  iron  industry,  275-277 
Catastrophes, 

provision  for,  in  coal  mining,  177 
Certificates, 
architect's,  339 
auditor's,  444 
bank,  443 
client's,  442 
inventory,  443 
weighing,  384 


696 


INDEX 


Charge  Accounts, 

department  stores,  401 
Charges  to  Guests'  Accounts,- 

hotel  accounting,  498-500 
Charts,  Organization  (See  "Organization 

charts") 
Checking, 

advertisements,  advertising  agency,  476- 

481 
department,  advertising  agency,  471 
City  Commission, 

municipal  corporations,  526 
Classification  of  Accounts, 
coa)  mining.  137-160 
malleable  iron  industry,  289-293 
metal  mining.  207-211,  214-215 

general      office,      208-209,      214-21S 
mine  office,  209-211,  214-21S 
municipal  accounting,  533-S4S 
budget.  S43-S4S 
primary,  534-537 
secondary,  537-543 
Cleaning  Department, 

malleable  iron  industry,  284-285,  290—291 
Clearing, 

accounts,   metal    mining,   211,   215,   216- 

217 
ranch  accounting,  267,  268 
Clients'  Certificates, 

public  accountants'  office,  442-443 
Clients  Ledger, 
coffee  trade,  376 
public  accountant's  office,  463 
Form,  463 
Closing  the  Books, 

advertising  agency,  483-484 
hotel  accounting,  5 17-5 18 
metal  mining,  223 
ranch  accounting,  250-263 
Coal  Consumed, 

valuation  of,  in  production  of  coal,  178 
Coal  Mining,  137-201 

account  classification,  137-160 
accounts  payable,  145 

accrued,  145 
accounts  receivable,  143-144 

accrued,  144 
balance  sheet,  140-151 
breaker,  139 

camps,  net  income  or  loss  from,  179-180 
capital   and   operating   expenditures   dis- 
tinguished, 177 
capital  stock, 
outstanding,  146 
subscribed,    146 
cash  account,  144 


Coal  Mining — Continued 
coal, 

in  transit,  143 

inventory,  152 

on  hand,  143 

sales,  152 
collateral  operations,  137 
contingent  liabilities,  146 
cost  of  coal  consumed  by  operatoi ,  i  78 
cost  statement, 

mining  and  selling,  197-200 

production  statistics,  201 
current  assets,  144 
current  liabilities,  146 
dead  work,  155-156 
deferred  charges,  144 
depletion,  157-158 

computation  of,  167-169 

reserves  for,  146 
deposits  outstanding  on  contracts,  142 
depreciation,  158-159,  173-176 

accrued,  146 

Federal  Trade  Commission  on,  175 

National  Coal  Association  on,  175-176 

output  method,  173-176 

rates  table,  174 

straight-line  method,  173-175 
development    costs,    amortization,    169- 
173 

illustrations,  171,  172 
development, 

accounts,  148 

amortized,  158 
dividends  declared,  146 
drainage,  155 

duplicate  columnar  record,  166 
equipment  accounts,  148,  149-150 

general   and   administration   expenses, 
160 

mining,  IS4-ISS 

operating  and  maintenance,   154-157, 
179 

other  expenses,  157 

selling,  160 
fixed  charges,  157-160 
freight  on  materials.  142 
general  expenditures,  148-149,  ISO 
haulage,  156 
illustrative  statements  and  entries,  180- 

201 
important  questions,  166-167 
income,  152-154 

charges  to  coal  sales,  152 

miscellaneous,  152-153 

other  charges,  153 

statement,  195-196 


INDEX 


697 


Coal  Mining — Continued 

insurance  against  catastrophe,  177-178 
investment  in, 

funds  and  securities,  141 

mercantile  operations,  141 

mine  plant  and  equipment,   141,  146- 
150 

other  property,  141 

tenant  buildings  and  camp,  141,  150- 
151 
long-term  debt,  14s 
materials  on  hand,  142 
method  of  production,  138-139 
notes  payable,  14s 
notes  receivable,  144 
operating  revenues,  154 
overhead,  157 
pay-roll  sheets,  162-166 

Forms,  164-165 
power,  156-157 
problems  of,  166-192 

journal  entries,  182-192 

trial  balance,  1 81-182 
profit  and  loss,  146 
property, 

abandoned,  151-152 

retired  and  replaced,  151-152 
real  estate,  140-141 
records,  special,  161-166 
reserves,  146 
royalties,  159-160 
sales  register,  161-162 

Form,  162-163 
securities     issued,      held      in      treasury, 

142 
special  funds  and  deposits  held,  146 
structures  accounts,  148,  149 
subscriptions  to  stock,  144 
surplus,  146 
timbering,  155 
tipple,  138,  156 
unadjusted  credit  items,  146 
unadjusted  debit  items,  14s 
undivided  profits,  146 
ventilation,  155 
C.  O.  D.  Sales, 

department  stores,  400-401 
Coffee  Trade, 345-395 

accounts  receivable  book,  358-360 

Form,  359 
bills  of  exchange  for  financing  purchases, 

347-348 
.  bought  sheet,  368-370 

Form,  369 
brokers,  356-357 
clients  ledger,  376 


Coffee  Trade — Continued 
contract  differences,  376—382 

account,  378 

close  of  fiscal  period,  379-381 

monthly  proof,  381-382 
cost  of  roasting,  387-388 
cost  statements,  393-39S 

goods  sold,  393 

grinding  and  packing,  394-395 

roasting,  394 
customers'  records,  372-383 
customer's  statement,  375 
daily  settlements,  368 
deliveries,  383-386 
departmentization,  391 
distributers,  types  of,  34s 
drafts  for  financing  purchases,  347-348 
exchange  delivery  book,  384-386 

Form,  385 
exchange  transactions,  366-368 

joint,  386 

records,  368-371 
expenses, 

packing,  388 
export,  346-348 
financing  purchase  of  green  coffee,  347- 

350 
futures,  366-368 
grading  certificate,  384 
grading  coffee,  365-366 
green  coffee,  345 

accounts  receivable  book,  358-360 
Porm,  359 

brokers,  356-357 

financing  purchase,  347-35© 

handling  costs.  348-350 

importing,  346-354 

inventory,  363-364 

list  book,  356-357 

marketing,  354-357 

purchases,  346-354 

sales,  357-360 

sales  records,  357-360 

shipment,  347-348 

spot  purchases,  352-354 

spot  purchases  register,  352-354 
Form,  355 
grinding  expense,  388-389 
hedging,  366-367 
importation,  346-364 

green  coffee,  346-354 

register,  350-352 
Form,  353 
insurance,  390-391 

on  shipments,  348-349 

on  stock,  363 


698 


INDEX 


Coffee  Trade — Continued 

inventory,  green  coffee,  363-364 
jobbing,  386-39S 
letters  of  credit,  350-352 

Form,  35 1 
list  book,  356-357 
margin  trading,  372-383 
marketing,  354-357 
New  York  Coffee  and  Sugar  Exchange. 

364-365 
option  day  book,  372-374 

Form,  373 
option  ledger,  374-375 

Form,  375 
option  month  book,  382-383 

Form,  382 
option  purchases,  372-374 
option  sales,  372-374 
options  analysis  journal,  376-379 

Form,  377 
overhead  expenses,  388-390 

distribution,  389-390 
packing  expense,  388 
price  determination,  395 

table,  395 
pricing  coffee,  365-366 
profit  and  loss, 

on  contract  differences,  379-381 

statement,  392 
quotation  table,  366 
recapitulation  statement,  370-371 

Form,  371 
retailing,  345,  386-395 
roasting,  34S.  386-395 

for  the  trade,  391 
sales,  357-360 

records,  357-360 
shrinkage  losses  on  shipments,  349 
sold  sheet,  368-370 

Form, 369 
sorting  costs  on  shipments,  349 
speculation,  367-368 
spot  purchases,  352-354 

register,  352-354 
Form,  355 
statements,  financial,  392-39S 
stock  book,  360-361 

Form,  360-361 
stock  records,  360-364 

Form,  360-361 
storing  costs  on  shipments,  349 
trading  in  coffee,  345 
trading  on  the  exchange,  364-386 
weekly  stock  report,  361-363 

Form,  362 
weighing  certificate,  384 


Collateral,  Items  Pledged, 

listed  on  financial  statement,  36 
Commercial    Letters    of    Credit    (See 

"Letters  of  credit,  commercvil") 
Commitments,  for  Merchandise, 
listed  on  financial  statement,  3i 
Comparison     Sheet     (See     "Statements, 

financial ") 
Concessionaires, 

hotel  accounting,  488-489 
Consolidated  Statement, 

municipal  accoiwting,  57s,  579 
Construction, 

department,  contracting,  326-327 
in  progress,  metal  mining,  211-212 
work,  malleable  iron  industry,  304-305 
Consumed  Accounts, 

ranch  accounting,  250-263 
Consumption  Record, 

ranch  accounting,  237-238 
Contract, 

cost  ledger,  contracting,  332-335 

Form,  334 
differences,  coffee  trade,  376-382 
malleable  iron  industry,  276-277 
sheet,  advertising  agency,  476-481 
Form,  480 
Contracting,  316-344 

accounting  department,  326 
accounting  procedure,  327-344 
accounts  receivable  ledger,  340-342 

Form,  341 
administration  department,  323-325 
architect's  certificate,  338 

Form,  339 
building  contracting  procedure,  3i7-3i8 
cash  records,  340 
construction  department,  326-327 
contracts, 
cost-plus,  319 
flat  sum,  318 
Forms,  322 
signed  record.  327 
types  of  318-320 
cost  recording,  332-335 
departmentization,  323-327 
depreciation  of  equipment,  330-33I 
equipment  control,  330-331 
estimating,  316-317 
department,  32s 
financing,  343 

income,  recording  of,  338-340 
insurance,  320-321 
labor, 

job  record  card,  327-328 
Form,  327 


INDEX 


699 


Contracting — Continued 
laboi — Continued 
pay-roll,  32<^-330 
time-keeping,  329-330 
ledger,  332-337,  340-343 
Forms,  334.  336,  341 
contract  cost,  332-335 

Form,  334 
owners,  340-342 

Form,  341 
subcontractors,  335— 337 
Form,  336 
new  business  department,  325 
organization,  323 

chart,  324 
overhead,  331-332 
payments,  321 

profits  on  contracts,  342-343 
purchasing,  326,  328 
requisition  for  payment,  337-338 
Form,  337 
register,  338 
Form,  338 
storing,  328-329 
time  limits,  321 
transfer  of  materials,  329 
voucher  register  and  journal,  332-33S 
Form,  332-333 
Control  Summaries, 

malleable  iron  industry,  308-3 IS 
Controller, 
duties,  10 

functional  representatives,  la 
staff  of,  12 

use  of  advisory  officers,  14 
Copy  Schedule, 

advertising  agency,  483 
Form,  482,  484 
Core  Department, 

malleable  iron  industry,  283-284,  290 
Corporations, 

municipal,  523-S33 
public,  523-533 

public  and  private  compared,  523.  532 
Cost  Accounting, 
department  for,  S 
malleable  iron  industry,  293-297 
public  accountant's  office,  424 
sheets,  prepared  by  cost  accounting  sec- 
tion, 5 
records, 

contract  cost  ledger. 

Form,  334 
data    for   estimated    costs,    malleable 
iron  industry. 
Form,  299 


Cost  Accounting — Continued 
records — Continued 

engagement    account,    public    accoun- 
tant's office. 
Form,  455 
monthly  cost  summary,  malleable  iron 
industry. 
Form,  298 
schedules,  hotel  accounting,  520-522 
Costing  Rate  for  Salaries, 

public  accountant's  office,  454-456 
Cost  of  Mining, 

coal,  197—200 
Credit  (See  also  "Loans") 

financial  statements  for  extension  of,  18-48 
manager,  relation  to  controller,  14 
municipal  corporations,  532 
statement  (See  "Statements,  financial") 
Crop  Record, 

ranch  accounting,  231-232 
table,  231-232 
Current  Assets  (See  "Assets") 
Current  Liabilities  (See  "Liabilities") 
Customers, 

invoices,  advertising  agency,  48 1-483 
records,  coffee  trade,  372-383 
Statement,  7 
coffee  trade,  375 


Dead  Work,  Coal  Mining,  155-156 
Debt, 

bonded,  listed  on  financial  statements,  2I 

long-term,  account,  coal  mining,  145 
Decentralization, 

municipal  corporations,  525-528 
Deferred  Charges, 

coal  mining,  144 

listed  on  financial  statement,  19 

metal  mining,  215-216 
Delegations, 

foreign  exchange,  73 
Deliveries, 

coffee  trade,  383-386 

department  stores,  420 
Department  Stores,  396-422 

accounts  receivable,  401 

alteration  departments,  411-412 

assets,  416 

balance  sheet,  415-417 

capital,  417 

cash, 

disbursements,  401-402 
discounts,  414-415 
receipts,  401-402 
records,  401-402 


■oo 


INDEX 


Department  Stores — Continued 
charge  accounts,  401 
C.  O.  D.  sales,  400-401 
development,  396 
discounts,  cash,  414-41S 
earnings,  417-422 
expense,  417-422 

administrative,  421-422 

buying,  418 

delivery,  420 

distribution  of,  412-414 

general,  421-422 

publicity,  419 

rent,  420 

selling,  419 
financial  statements,  416-422 
financing,  397-398 
income,  417-422 
inventories,  403-411 

book,  408 

periodizing,  410 

physical,  408 

pricing  systems,  403-407 

reconciling    book    and    physical,   408- 
409 

turnover  of,  410 
liabilities,  417 

life  insurance  on  executives,  415-416 
maintenance  and  operation  of  plant,  420- 

421 
mark-down,  403-407 
mark-up,  403-407 
merchandise  accounts,  402-403 
merchandise  purchases,  402-403 
organization,  396-397 
pricing  systems,  403-408 
rent  distribution,  413-414 
sales,  398-401 

records,  398-400 

slips,  398-400 

subject  to  alteration  of  goods,  400 
statements, 

financial,  416-422 

of  earnings  and  expenses,  418-422 
stock  book,  409 
turnover  of  stock,  410 
Departmentization, 

advertising  agency,  469-472 
coffee  trade,  391 
contracting,  323-327 
hotel  accounting,  492-493,  511 
malleable  iron  industry,  275-28S 
ranch  accounting,  228 
savings  bank,  109-110 
Departure  Sheet, 

hotel  accounting,  493-494 


Depletion, 

coal  mining,  157,  167 
metal  mining,  213-214,  223 
Deposits, 
listed  in  financial  statement,  25,  45 
savings  bank,  in-113 
route  of, 

Form,  112 
ledger,  110-I13 
Depreciation, 
coal  mining,  146,  158-159.  173-176 
Federal  Trade  Commission  on,  17s 
National  Coal  Association  on,  175-176 
output  method,  173-176 
rates,  table,  174 
straight  line  method,  1 73-1 75 
equipment, 

contracting,  330-331 
ranch  accounting,  241-242 
hotel  accounting,  516-5x7 
metal  mining,  213-214 
ranch  accounting,  256-257,  260,  261 
real  estate,  listed  on  comparison  sheet,  39 
Development, 
mine  investment,  148,  158,  210,  215 
amortization  of  costs,  169-173 
as  deferred  charges,  215 
Disbursements, 

cash,  metal  mining,  222 
Discounting, 

bills  of  exchange,  foreign  exchange,  95 
cash,  department  stores,  414-415 
Distributers, 

coffee  trade,  34s 
Dividend, 

savings  bank,  124 

calculating  and  recording,  124-12S 
Drafts, 

acceptances,  90-93 

foreign  correspondents,  96 
maturity  record,  92-93 

Form,  92 
register,  90-92 

Form,  91 
unmatured,  95-96 
coffee  trade,  for  financing  purchases,  347 

348 
cover  and  payment,  93-94 
dollar,  97 

foreign  exchange,  90-99 
notification  of  cover,  93-94 

Form,  93 
savings  bank,  iio-iii 
route  of. 
Form,  112 
unpresented  foreign,  96-07 


INDEX 


701 


B 


Earnings, 
department  stores,  417-422 
hotel  accounting,  502 
Form,  S03 
Economic  Restrictions  on  Financing, 

municipal  corporations,  S3I-S32 
Educational  Work, 

public  accountant's  office,  432-433 
Eggs, 

ranch  accounting,  258 
Employees  (See  also  "Labor") 
accommodations, 

metal  mining,  221-222 
ranch  accounting,  2SS 
meals,  hotel  accounting,  S14-S1S 
Engagements,  Public  Accountant, 
cost  account,  454 

Form,  455 
list  of,  435 
Form,  436 
Equipment, 
coal   mining,   investment   in,    141,    146— 

150 
control,  contracting,  330-331 
depreciation  of,  contracting,  330-331 
list,  metal  mining,  220 
ranch  accounting,  241-242,  265-266 
depreciation,  241-242 
Estimates, 

costs,  malleable  iron  industry,  298-302 
contracting,  316-317 
department  of,  contracting,  325 
Ethics  of  Public  Accountancy,  426-427 
Exchange  Delivery  Book, 
coffee  trade,  384-386 
Form,  38s 
Exchange    (See   also    "Foreign    exchange 
accounting") 

transactions,  cofifee  trade,  366-371 
Expenditures, 

distinction  between  capital  and  operating, 

coal  mining,  177 
hotel  record,  508 

n-.etal  mining,  classification  of,  203-204 
municipal,  S3S.  536-537.  538,  542-543 
Form,  5S6 
Expenses, 

coal  mining,  154-157,  160 
coffee  trade,  388 
department  stores,  417-422 
administration,  421-422 
distribution  of,  412-414 
malleable  iron  industry,  292,  308 
metal  mining,  208-209,  214-21S 


Expenses — Continued 

ranches,  250-263 

ranches, 
analysis  of,  230 

selling  coal  mining,  160 

statements,  prepared  by  cost  accounting 
section,  5 
Export, 

coffee  trade,  346-348 

department,  advertising  agency,  471-472 


Factory, 

cost  accounting  department,  S 
Farm  Costs, 

problems  in  determining,  227 
Farming  (See  "Ranch  accounting") 
Farm  Produce  Inventory,  242-243 
Federal  Trade  Commission  on, 

amortization  of  development  costs,  coal 
mining,  169-173 
illustrations,  171,  172 

cost  of  coal  consumed  by  oiterator,  178 

depreciation,  coal  mining,  17s 

segregation  of  maintenance  and  operating 
costs,  coal  mining,  179 
Fees, 

public  accountant,  447-448 
Fertilizer, 

ranch  accounting,  253 
Filing  Department, 

advertising  agency,  471 
Filing  Reports, 

public  accountants,  445-446 
Finance, 

municipal  corporations,  529-531 
Financial  Conditions    (See  also  "State- 
ments, financial") 

carrying  of  obsolete  merchandise,  35 

current  liabilities,  analysis  of,  37 

estimated  through  comparison  sheets,  33 

municipalities,  533 

ratio  quick  assets  to  current  liabilities,  33 

use  of  ratios  in  appraising  quick  assets,  34 
Financial  Statements  (See  "Statements, 

financial") 
Financing, 

coffee  trade,  347-350 

contractors,  343 

department  stores,  397-398 
Finishing  and  Shipping  Department, 

malleable  iron  industry,  291-292 
Fiscal  Year, 

ranch  accounting,  239-«40  ' 


702 


INDEX 


Fixed  Charges, 

coal  mining,  157-160 
Fixtures, 

listed  on  financial  statements,  39,  44 
Flat-Sum  Contracts,  318-319 
Food  Control  System, 

hotel  accounting,  510-512 
Foreign  Exchange  Accounting,  49-100 
accounting  records,  57-60 
bankers'  checks,  74-75 
banking  transactions,  49 
bills  of  exchange,  discounting,  95 
books  of  original  entry,  49-75 
cables,  64-73 

dealing  with  the  customer,  64-66 
dealing  with  the  foreign  correspondent, 

66-68 
form    of   authorization   sheets   for  ex- 
change sold  and  bought,  66 
form  of  bill  for  sale  of  cable  exchange, 

65 
form    of    cable    confirmation    sent    to 

correspondent,  67 
recording  the  sales  transactions,  68-71 
commercial  letters  of  credit,  86-90 
documents  upon  acceptance,  87 
documents  upon  payment,  88 
issue,  88-90 
notice  of  granting,  90 

Form,  89 
record  of  letters  issued,  88 
commercial  transactions,  49 
delegations,  73 
drafts,  90-99 

acceptances,  90-93 

acceptances,  foreign  correspondents,  96 

acceptances  maturity  record,  92-93 

Form,  92 
acceptances  register,  90-92 

Form,  91 
acceptances,  unmatured,  95-96 
cover  and  payment,  93-94 
dollar,  97 
notification  of  cover,  93-94 

Form,  93 
unpresented  foreign,  96-97 
exchange  purchases,  71,  81 
exchange  sales,  64,  70-71 
foreign  investments,  62-63 
foreign  specie,  6o-6l 
future  contracts,  56 
general  considerations,  49-50 
gold  shipments  (bullion),  61-62 
ledgers  and  accounts,  75-100 
letter  of  advice  for  drafts  drawn  on  cor» 
respondent  form,  74 


Foreign  Exchange  Accounting — Cont'd 

letter  payments,  73 

letters  of  credit  (See  above  under  "Com- 
mercial letters  of  credit,  "  also  "Trav- 
elers' letters  of  credit") 
long  position,  56 
loro  accounts,  86 
nostro  accounts,  72-73,  75-86 
Forms,  77 

arbitrage  accounts,  85 

debit  note  to  foreign  correspondent. 
Forms,  83 

entries,  79 

joint  accounts,  84-85 

reconciliation,  8o-8i 
Form,  82 

steamer  proof,  84 

transactions,  73 
nostro  balances,  56 
nostro  interest  claims  receivable,  71 
organization,  50 
position  sheet,  54-56 

Form,  55 
profit  and  loss  accounts,  59-60,  99-100 
purchase  journal. 

Form,  69 
records, 

of  final  entry,  58 

of  original  entry,  57 
sales  journal, 

Form,  69 
short  position,  56 
spot  contracts,  56 
statements,  58 

time  bills,  advances  on,  63-64 
trader,  51-52 

position  of,  56 
trading  profits,  52-54 

arbitrage,  54 

futures,  53 
travelers'  checks,  97-99 
travelers'  letters  of  credit,  97-99 
Forms  (See  list  of  "Forms  and  Charts"  in 

table  of  contents) 
Forwarding  Department, 

advertising  agency,  470 
Foundry  (See  "Iron  foundry") 
Freight, 

charges,  metal  mining,  206 
on  materials,  account,  coal  mining,  143 
Funds,  Municipal, 

classification  of,  537,  561-575 
general,  561-565 
Futures, 

coffee  trade,  366-368 
foreign  exchange,  53 


INDEX 


703 


Garden, 

exjjense,  ranch  accounting,  256,  258-259 

produce,  ranch  accounting,  254-255 
General  Office  Accounting  Section, 

functions,  4 
Glossary  of  Terms  Used, 

advertising  agency,  484-487 
Gold  Shipments, 

foreign  exchange,  61-62 
Good-Will, 

accounting  firm,  430 

listed  on  financial  statement,  40,  44 
Governmental  Accounting  (See  "  Munici- 
pal accounting") 
Grading  Certificate, 

coffee  trade,  384 
Graphic  Statements, 

municipal  accounting,  584-585 
Forms,  584,  S85 
Guaranty  Fund, 

Bavings  bank,  124 
OtresTS, 

accounts,  hotel  accounting,  496-500 

register,  hotel  accounting,  493-494 


Haulage, 

coal  mining,  156 
Hedging, 

coffee  trade,  366-367 
Hotel  Accounting,  488-522 

accounts  receivable  ledger,  502-505 

adjustment  entries,  516-5x7 

arrival  sheet,  493-494 

books  of  account,  492-493 

by-product  sales,  516 

cash  book,  505-S08 

cash,  handling,  S05-508 

cigar  department,  521 

closing  the  books,  517-518 

concessionaires,  488-489 

cost  compilation,  512-516 

cost  schedules,  520-522 

departmental  operations,  511 

departmentization,  492-493 

departure  sheet,  493-494 

depreciation,  516-517 

earnings  book,  502 
Form,  503 

employees'  meals,  514-515 

expenditures  record,  508 

financial  statements,  518-52* 

food  control, 

analysis  sheet,  510-512 
system,  510-513 


Hotel  Accounting — Continued 
general  books,  500-501 
guests,  accoimts,  496-500 

accounts,  verification  of,  501 

charges  to  accounts,  498-500 

control  account,  498 

ledger  card,  496-498 
Form,  497 

ledger  sheet,  498 
Form,  499 

register,  493-494 
hotel  sheet  system,  502-505 

Form,  506 
income, 

from  food,  49s 

from  rooms,  493-494 

sources  of,  488-489 

verification  of,  501 
labor,  513-S14 
laundry,  522 
management,  490-492 
mineral  water  department,  53I 
miscellaneous  accounts,  516 
nature  of  business,  488-490 
officers'  meals,  S14-51S 
organization,  490-493 

chart,  491 
overhead,  513-514 
profit  and  loss  account,  517-518 
profit  and  loss  statement,  518-518 
purchases,  500 
records,  492-493 
restaurant,  520-521 

cashier's  report,  495 
Form,  495 
rooms, 

cost  compilation,  512-513 

cost  of,  520 

count  book,  493-494 
Form,  494 
sales  journal,  502-505 
statements,  financial,  518-522 
stores,  516 

difference  in,  516 

inventory,  508-510 

perpetual  inventory,  509-51© 
types  of  hotels,  489 
valet  department,  522 
vouchers  payable  register,  508 
waiters*  checks,  register,  495 


Imports, 

of  green  coffee,  346-364 
record,  coffee  trad»,  350-353 
Form, 351 


704 


INDEX 


Improvements, 

ranch  accounting,  240,  266 
LvcoME, 
accounts, 

coal  mining,  152-154 

contracting,  338-340 

department  stores,  417-422 

hotel  accountmg,  492-499 

income  and  outgo  statements,  578-581 

metal  mining,  209,  211 

municipal   accounting,    535,    536,    540- 

541.  553 
municipal  corporations.  524,  534 
operating,  coal  mining,  154 
public  accountant's  office,  457-462 
ranch  accounting.  250-263 
municipal  accounting,  534 
public  accountant's  office,  456-462 
sources    of,    hotel    accounting.    488-489, 

493-495 
statement,  coal  mining,  195-196 
Indebtedness  (See  "Liabilities") 
Indirect  Charges, 

metal  mining,  216-217 
Insurance, 
against   catastrophe,    coal   mining.    177- 

178 
coffee  trade,  390-391 
contracting,  320— 321 
listed  on  financial  statement,  23 

on  merchandise,  36 
on  shipments,  coffee  trade,  348-349 
on  stock,  coffee  trade,  363 
policy  data,  metal  mining,  220 
policy,  on  savings  bank  mortgages,  115 
Interest, 

foreign  exchange,  nostro  interest  claims 

receivable,  71-72 
on   investment,   ranch   accounting.   257- 

258 
payments  on   mortgages,   savings  bank, 
115-116 
Interfund  Eliminations, 

municipal  accounting.  575-577 
Inventory  (See  aiso  "Stores") 

accounts,  ranch  accounting,  250-263 
book,  department  stores.  408-409 
certificate,  public  accountant's  office.  442 
coal,  coal  mining.  152 
cost  or  market  price.  25 
department  stores.  403-411 
green  coffee,  coffee  trade.  363-364 
listed  on  financial  statement.  25,  44 
stores  hotel  accountmg.  508-510 
malleable  iron  industry.  303-304 
Work-in-process,  303-304 


Inventory — Continued 
metal  mining,  212 

materials  and  supplies,  217-219 
Form,  219 
ranch  accounting,  239-250 
equipment,  241-242 
farm  produce,  242-243 
improvements,  240-241 
live  stock,  244-248 
range  cattle,  248-250 
Investigations, 

public  accountant's  office,  424 
Investments, 
coal  mining, 

in  funds  and  securities,  141-142 

in  mercantile  operations,  141 

in  mine  plant  and  equipment,  141,  146- 

150 
in  other  property,  141 
in   tenant    buildings   and   camp,    141, 
ISO-151 
foreign,  foreign  exchange,  62-63 
interest  on,  ranch  accounting,  257-258 
listed  on  financial  statement,  25 
savings  bank,  108 
record,  116-117 
Invoices, 
municipal  accounting,  556 

Form,  560,  561 
prepared  by  billing  department,  7 
prepared  by  tabulating  department,  S 
to  customers,  advertising  agency,  481-483 
vouchering  of,  6 
Iron  Foundry,  275-285 
Iron  Industry  (See  "  Malleable  iron  indus- 
try") 


Jobbing, 

coffee  trade,  386-395 
Joint  Exchange  Transactions, 

coffee  trade,  386 
Journal, 
entries, 

advertising  agency.  476 
coal  mining,  problem,  182-192 
municipal  accounting,  563-565.  S68-S7I 
municipal  general  fund,  563-565 
municipal     special     assessment     fund, 

568-571 
ranch  accounting,  250-263 
metal  mining,  221 
municipal  accounting,  551-553 
purchases  issued,  municipal  accounting, 
553 


INDEX 


705 


Journal  Records  (Forms), 

advertising  agency  cash  book,  472 
coal  mining,  coal  sales  register,  162,  163 
coffee  trade, 

importation  register,  353 

letter  of  credit  book,  351 

option  day  book,  373 

option  month  book,  382 

spot  purchases  register,  355 
contracting, 

requisition  for  payment  register,  338 

voucher  register  and  journal,  332,  333 
foreign  exchange, 

sales,  69 

purchase,  69 
municipal  accounting, 

bond  register,  for  10- year  bonds,  550, 
551 

pay-in  voucher,  553.  554 

public    accountants,    service    and    ex- 
I)ense,  461 

voucher  register,  552 

vouchers,  7,  8 
Junior  Partners, 
public  accountant's  office,  428-431 


Labor, 

cost, 

malleable  iron  industry,  288-295 
ranch  accounting,  236-237 
distribution    sheet   for   labor,    materials, 
and  supplies,  metal  mining,  217-219 
Forms,  218,  219 
hotel  accounting,  513,  514 
pricing    and    extension    of,    by    pay-roll 
section,  6 
Labor  Records  (Forms), 

coal  mining,  pay-roll  sheet,  164,  165 
contracting,  job  record  card,  327-328 
malleable  iron,  individual  slip,  288 
metal  mining,  distribution  sheet,  218 
municipal,  pay-roll  order  check,  557 
ranch  accounting,  234-237 
chronological  record,  234-235 
ledger  record,  235-237 
Land  (See  "Real  estate") 
Leases, 

metal  mining,  222 
Ledger  (See  also  "Ledger  records") 
accounts  receivable,  control  of,  6 
advertising  agency,  481 

Form,  482 
contracting,  332-337,  340-34a 
Forms,  334,  336,  341 
VOL.  in — 45 


Ledger — Continued 

depositors,  savings  bank,  110-113 
factory,    controlled    by    cost    accounting 

section,  5 
foreign  exchange,  75-100 
general, 

controlled  by  general  office  accounting 
section,  4 

savings  bank,  121 
hotel  accounting,  guest  ledger  sheet,  498 

Form,  499 
mvmicipal  accounting,  546-551 
ovmer's,  contracting,  340-342 

Form,  341 
stock  and  bond,  savings  bank,  117 
Ledger  Records  (Forms), 

advertising  agency,  publishers,  482 
coffee  trade,  options,  377 
contracting, 

accounts  receivable  (owners),  341 

contract  cost,  334 

subcontractors,  336 
foreign  exchange, 

nostro  account  for  hand  entry,  77 

nostro    account    for    machine    entry, 
77 
hotel, 

earnings      book,      503 

guests  card,  497 

guests  sheet,  499 
malleable  iron  industry,  stores,  309 
metal    mining,    perpetual    inventory    of 

materials  and  supplies,  219 
municipal, 

tax,  546,  547 

Utility,  548,  549 
Legal  Restrictions  on  Financing, 

municipal  corporations,  531 
Letter  of  Advice 
foreign  exchange. 

Form,  74 
Letters  of  Credit, 
coffee  trade,  3SO-352 
commercial,  86-90 

documents  upon  acceptance,  87 

documents  upon  payment.  88 

issue,  88-90 

notice  of  granting,  90 
Form,  89 

record  of  letters  issued,  88 
liability  for,  listed  on  financial  statement, 
23 

Form,  22 
record,  coffee  trade,  350-352 

Form,  351 
travelers',  97-99 


706 


INDEX 


Liabilities, 

classification    of    municipal    accounting, 

535.  539 -S40 
contingent,  listed  on  financial  statement, 

21-23 

current,  " 

analysis  of,  37,  45 

defined,  37 

ranch  accounting,  267 

ratio  of,  to  quick  assets,  33 
department  store,  417 
fixed  ranch  accounting,  267 
listed  on  financial  statement,  19,  38,  44 
long-term, 

depreciation  under,  39 

Hsted  on  financial  statement,  21,  45 
malleable  iron  industry,  306-307 
municipal  accounting,  562,  566,  572-576, 

582 
notes  payable,  analysis  of,  37 
of  accountant,  442 
ranch  accounting,  267 
short-term,  listed  on  financial  statement,  2 1 
Liberty  Bonds, 

listed  on  financial  statement,  19,  21  . 
Library, 

public  accountant,  433-434 
Life  Insurance  on  Executives, 

department  stores,  415-4x6 
List  Book, 

coffee  trade,  356-357 
Live  Stock,  229,  244-248,  265,  268 
classification  of,  246 
cost  of,  244-248 
expense,  257,  262 
inventory,  262 
records,  tables,  232^233 

for  consumption,  233 

for  sale,  232-233 
Loans  (See  also  "  Credit  ") 

listed  on  financial  statements,  44 
methods  of  banks  in  giving,  30-33 
mortgage,  savings  bank,  114-116 
terms  of,  18 
Location  Sheet, 

public  accountant's  office,  435-437 

Form,  436 
LoRO  Accounts, 

foreign  exchange,  86 
Loss  (See  also  "  Profit  and  loss") 
malleable  iron  industry,  313-314 

Form,  313 

M 

Machinery, 

listed  on  financial  statement,  39,  44 


Maintenance, 
and  operating  expenses,  coal  mining,  154- 

157 
and  operation  of  plant,  department  stores, 

420-421 
and  repairs  account,  metal  mining,  210. 

215 
expenses,     segregation     from     operating 

expenses,  coal  mining,  179 
Malleable  Iron  Industry,  275-315 
accounting  methods,  285-305 
additions,   betterments,   and   permanent 

improvements,  305 
annealing  department,  284-285,  291 
assembling,  284-285 
assets,  306 

balance  sheet,  306-307 
Bessemer  process,  276,  281-282 
blacksmith  shop,  283-284,  292 
carpenter  shop,  292 
castings,  275-277 
charts,  use  of,  314-315 
classification  of  accounts,  286-293 
cleaning  department,  284-285,   290-291 
construction  work,  304-305 
contracts,  276-277 
control  summaries,  308-315 
core  department,  283-284,  290 
eosts, 

class,  296-297 

classification  of,  289-293 

estimates  of,  298-303 
Form,  299 

job,  295 

labor,  288-293 

manufacturing,  307 

material,  288-293 

methods  of  finding,  285-305 

standardized,  285-286 

tonnage,  293-295 
cupola,  275-276 
daily  summary  of  metals  melted,  311-312 

Form,  311 
departmentization,  275-285 
development,  275-277 
expenses, 

administrative,  308 

general,  292 

other,  308 
finishing  and  shipping  department,  391- 

292 
foundry,  275-285 
functional  organization,  277-279 

Form,  279 
inventories,  303-304 
inventory  work-in-process,  303-304 


INDEX 


707 


Malleable  Iron  Industry — Continued 
labor  slips,  288 

Form,  288 
liabilities,  306-307 
losses  in  manufacture,  313-314 

Form,  313 
manufacturing  departments,  277-28S 
manufacturing  processes,  275-285 
melting  department,  281-282,  289 
metal,  280,  289 

molding  department,  282-284,  29° 
monthly  summary  of  pig  iron  contracts 
vs.  unfilled  orders,  312 

Form,  312 
net  worth,  307 
organization,  277-279 

Forms,  278,  279 
overhead  costs,  288-293 
overhead  distribution,  297-298 
pattern  department,  283-284,  292 
processes  of  manufacture,  277-278 

chart,  278 
profit  and  loss  statement,  307-308 
quotations,  298-302 
Form,  299 

comments,  301-302 

examples,  300-301 
raw  material,  280-281 
sales,  307 

sources  of  charges  to  accounts,  288-289 
statements,  financial,  305-308 
statistical  records,  308-315 
stores,  280-281 

accounting  for,  302-303 

ledger,  302-303 
Form,  309 
superintendent's    individual    car    record, 
308-310 

Form,  309 
superintendent's  melting  order,  3 10-3  n 

Form,  310 
supplies,  280-281 
trimming    and    inspecting    department, 

291 
uniform  accounting,  285-287 
Management, 
hotels,  490-492 

savings  bank,  mutual,  106-107 
Manager's  Salary, 

ranch  accounting,  256 
Manufacturing, 
cost,  malleable  iron  industry,  307 
departments,    malleable    iron    industry, 

277-285 
Margin  Trading, 
coffee  trade,  372-383 


Mark-Down,   Department  Stores,  403- 

407 
Mark-On,  Department  Stores,  403-408 
Mark-Up,  Department  Stores,  403-407 
Market  Value, 

farm  produce,  242-243 

live  stock,  244-248 
Marketing,  Coffee,  3S4-364 
Materials, 

costs,  malleable  iron  industry,  288-293 

distribution,  metal  mining,  217-219 
Form,  219 

on  hand,  coal  mining,  142 
Mechanical  Department, 

advertising  agency,  470 
Melting  Department, 

malleable  iron  industry,  281-282,  289 
Memorandum  Records  (Forms) 

acceptance  maturity  record,  92 

acceptance  register,  foreign  exchange,  91 

accountant's  time  report  for  each  client, 
449 

loose-leaf  record  of  reports  delivered,  44S 
Merchandise, 

accounts,  department  stores,  402-403 

controller,  13 

cost  of  carrying  obsolete  stock,  35 

determining  turnover,  34 

insurance  carried  on,  listed  on  financial 
statement,  36 

inventory  listed  on  financial  statement, 
25.  44 

purchases,  department  stores,  402-403 
Metal, 

malleable  iron  industry,  280,  289 
Metal  Mining,  202-225 

account  classification,  207-211,  214-21S 
general  office,  208-209,  214-215 
mine  office,  209-211,  214-215 

accounting  records,  207 

assaying  ores,  205-206 

assays,  current,  220 

balance  sheet,  form,  224-225 

cash  disbursements,  222 

cash  receipts,  222 

clearing  accounts,  21S 

closing  the  books,  233 

construction  in  progress,  211-212 

control  accounts,  211-212 

deferred  charges,  215-2x6 

depletion,  213-214 

depreciation,  213-214 

distribution   sheet   for   labor,    materials, 
and  supplies,  217-219 
Forms,  218,  219 

employees'  acconunodations,  321-222 


7o8 


INDEX 


Metal  Mining — Continued 

ef4uipment  list,  220 

expenditures,  classification  of,  203-204 

freight  charges,  206 

general  considerations,  201-202 

general  office,  207 

indirect  charges,  216-217 

insurance  policy  data,  220 

inventories,  212 

journal,  221 

leases,  221 

mine  development  a  deferred  charge,  215 

mine  office,  207 

mine  superintendent,  207 

operations, 

miscellaneous,  221 
nature  of,  203-204 

office  organization,  206-207 

ore  shipments,  220-221 

pay-roll,  217 

profit  and  loss  statement,  form,  225 

property  list,  220 

purchases,  221 

reports,  annual,  223-225 

reserve  for  depletion,  223 

royalties,  223 

selling  ores,  204-206 

settlement  sheet,  206 

shipper's  agent,  206 

smelting  ores,  204-206 

statistical  records,  220-221 

stores  system,  217-219 

surplus  from  donated  stock,  223 

valuing  ore  in  transit,  212-213 

valuing  ore  mined,  212-213 

voucher  register,  221 
Mine  Camps, 

income  or  loss  from,  179 
Mining  (See  "Coal  mining,"  "Metal  min- 
ing") 
Molding  Department, 

malleable  iron  industry,  282-284,  290 
Money, 

deposits  listed  on  financial  statement,  25, 
45 
Mortgage, 

listed  on  financial  statement,  39 

record,  savings  bank,  114-116 
Municipal  Accounting,  523-585 
Forms,  554-56o 

assets,  562,  566,  572,  573.  574-575.  576 
accounts,  535.  538-539 

balance  sheets, 
capital  fund,  573 
consolidated,  575-577 
general  fund,  562-563 


Municipal  Accounting — Continued 
balance  sheets — Continued 

sinking  fund,  574 

special  assessment  fund,  566-567 

trust  fund,  574-575 

utility  fund,  572 
bond  register,  551 

Form,  550-551 
books  of  original  entry,  551-553 
budget, 

accounts,  543-545,  564-565,  569-571 

position,  562-563,  567,  572,  573,  574 

statements,  581 
capital  accounts,  535,  540.  543-545 
capital  fund,  573 

statement  of  financial  condition,  573 
cash  forms,  556 
cash  records,  55I-SS3 
classification  of  accounts,  533-545 

budget,  543-54S 

primary,  534-537 

secondary,  537-543 
expenditure, 
Forms,  556 

accounts,  535.  536-537.  538.  542-543 
financial  condition,  533-534 
funds,  537.  561-575 
general  fund,  561-565 

journal  entries,  563-565 

statement  of  financial  condition,  562-- 
563 
income  and  outgo,  534 
interfund  eliminations,  575-577 
invoice,  556 

Form,  560,  561 
journal,  55I-5S3 
journal  entries,  563-565.  568-571 

general  fund,  563-565 

special  assessment  fund,  568-571 
ledger,  546-551 
liabilities,  562,  566,  572-576 

accounts,  535,  539 
non-revenue  accounts,  535,  536,  541 
order  checks,  556 

Forms,  557.  5S8 
pay-in  voucher,  556 

Forms,  553-554 
problems,  533-534 

proprietorship,  562,  567,  572,  573,  574, 
575.  576 

accounts,  535,  540,  543-545 
purchase  order,  556 

Form,  559 
real  estate  tax  receipt,  556 

Form,  555 
records,  545-553 


INDEX 


709 


Municipal  Accounting — Continued 
register  of  purchase  orders,  SS3 
regular  accounts,  563,  568-569 
revenue  accounts,  535,  536,  540-541 
revenue  and  expenditure,  534 
sinking  fund,  574 

statement  of  financial  condition,  574 
special  assessment  fund,  566-571 

journal  entries,  568-571 

statement  of  financial  condition,  566- 
567 
statements    (See   also  subheading  below 
"statements  of  final  condition") 

budget  accounts,  581 

consolidated,  of  financial  position,  S7S- 
577 

cost,  582-584 

financial,  560-585 

graphic,  584-585 
Forms,  584,  585 

income  and  outgo,  578-581 

indebtedness,  582 
statements  of  financial  condition, 

capital  fund,  573 

consolidated,  575-577 

general  fund,  562-563 

sinking  fund,  574 

special  assessment  fund,  566-567 

trust  fund,  574-S7S 

utility  fund,  572 
stores  record,  553 
surplus  analysis,  580 
tax  roll,  550 

Form,  546-547 
trust  fund,  574-575 

statement  of  financial  condition,  574- 
57S 
uniform  accounting,  528,  534 
utility  fund,  571-572 

statement  of  financial  condition,  572 
utility  ledger,  550 

Form,  548-549 
voucher  register,  553 

Form,  552 
Municipal  Corporations,  523-533 
administrative  boards,  525-526 
budget  estimates,  530-531 
budgets,  529-531 
city  commission,  526 

comparison  of  public  and  private  corpora- 
tions, 523-525.  532-533,  535 
credit,  532 

decentralization,  525-528 
definition,  523 
finance,  529-531 

restrictions  on,  531-533 


Municipal  Corporations — Continued 

functions,  528-529 

income  accotmt,  524-525 

organization  of,  525-528 

overlapping  of  jurisdiction,  526-528 

private  corporations,  523-525.      S32-533i 
535 

purpose  of  public  corporation,  524 

source  of  funds,  529 

uniform  accounting,  528,  534 
Mutual    Savings    Bank    (See    "Savings 
bank") 


N 


National  Coal  Association,  on, 

amortization  of  development  costs,  coal 
mining,  169-173 
illustrations,  171,  172 

cost  of  coal  consumed  by  operator,  178 

depreciation,  coal  mining,  175-176 

insurance      against      catastrophe,      coal 
mining,  177-178 

net   income    or    loss    from    camps,    coal 
mining,  179-180 
New  Business  Department, 

contracting,  325 
Newspaper  Accounts  Payable, 

advertising  agency,  481 
New  York  Coffee  and  Sugar  Exchange, 

coffee  trade,  364-365 
Non-Revenue  Accounts, 

municipal  accounting,  535,  536,  541 
NosTRO  Accounts, 

foreign  exchange,  72-73.  75-86 
Notes  Payable, 

account,  coal  mining,  145 

listed  on  financial  statement,  23,  37,  44 
Form,  22 
Notes  Receivable, 

account,  coal  mining,  144 

listed  on  financial  statement,  23,  43 


Office, 

account     classification,     208-209,     214- 

215 

mine,  207-215 
organization, 
mining,  206-207 

public  accountant's  office,  431-432 
time  report,  449-451 
Form,  453 
Officers'  Meals, 

hotel  accounting,  S14-51S 


7IO 


INDEX 


Opkrating  Expenditures,  Coal  Mining, 
IS4-IS7 
distinction    from    capital     expenditures, 

177 
segregation  from  maintenance  expenses, 
179 
Option  Records,  Coffee  Trade,  372-383 
analysis  journal,  376-379 

Form,  377 
day  book,  372-374 

Form,  373 
ledger,  374-375 

Form,  375 
Orders, 

advertising  agency,  476-481 

Forms,  476,  477 
extension  of,  by  billing  section,  7 
malleable  iron,  superintendent's  melting. 

Form,  310 
Order  Checks, 

municipal  accounting,  556 

Forms,  557.  558 
Ore. 

assaying,  205-206 
breaking  account,  210,  21S 
in  transit,  valuation  of,  212-213 
mined,  valuation  of,  213-213 
sale  of,  204-206 
shipments,  220-221 
smelting,  204-206 
Organization, 

accounting  department,  1-17 

chart,  16 

divisions  of,  3 
accounts  payable  section,  6 
accounts  receivable  section,  6 
advertising  agency,  465-466 

chart,  467 
analysis  section,  S 
auditor's  duties,  9 
billing  section,  7 
branch  accounting,  4 
contracting,  323 

chart,  324 
controller's  duties,  1O-17 
cost  accounting  section,  S 
department  stores,  396-397 
general    office    accounting    department, 

3 
hotels,  490-492 

chart,  491 
malleable  iron  industry,  277-279 

charts,  278,  279 
municipal  corporations,  525-528 
office,  mining,  206-207 
pay-roll  section,  6 


Organization — Continued 

public  accountant's  office,  433-464 

chart,  429 
ranch  accounting,  226-239 
sales  classification  section,  S 
savings  bank,  109-114 

mutual  chart  of,  107 
tabulating  section,  5 
Organization  Charts, 
accounting,  16 
advertising  agency,  467 
contracting,  324 
hotel,  491 

malleable  iron  foundry,  279 
public  accountant's  office,  429 
savings  bank,  mutual,  107 
Overhead, 

contracting,  331-333 
distribution, 

coflee  trade,  388-390 

hotel  accounting,  514 

malleable  iron  industry,  297-298 
general  account,  metal  mining,  2io-2Ht 

215 

hotel  accotmting,  51 3-5 14 
malleable  iron  industry.  288-293,  297 
metal  mine  accounting,  216,  217 
mine,  account,  coal  mining,  157 
public  accountant's  office,  456 
Overtime  Work, 
public  accotmtant's  office,  4.34-43S 


Partnerships, 

public  accountant's  office,  428-431 
Patents, 

listed  on  financial  statement.  40,  44 
Pattern  Department, 

malleable  iron  industry,  283-284,  292 
Payments, 

made  on  contracts,  321 
Pay-roll, 

contracting,  329-330 

department  for  preparation  of,  6 

metal  mining,  217 

sheets,  coal  mining,  162-166 
Forms,  164-165 
Petty  Cash, 

savings  bank,  119 
Plan  and  Copy  Department,  Advertis- 
ing Agency,  469 
Plant, 

coal  mining,  investment  in,  141,  146-150 
Position  Sheet, 

foreign  exchange,  54-56 
Porm,  55 


INDEX 


711 


Posting, 
media, 

for  factory  ledger,  s 
for  general  ledger,  4 
Poultry  and  Egg  Record, 
ranch  accounting,  238-239 
Form,  239 
Power  Account, 

coal  mining,  156-157 
Prices, 

coffee  trade,  365,  395 
entering  of,  in  orders,  7 
Printing  Department, 

advertising  agency,  470 
Production, 
controller,  13 

ranch  accounting,  229,  252,  262 
statistics,  coal  mining,  201 
Proficiency  Reports, 

public  accountant's  office,  432 
'rofit  and  Loss, 
account, 

coffee  trade,  379-381 
foreign  exchange,  59-60,  99-100 
hotel  accounting,  517-518 
metal  mining,  208-211,  214-21S 
on  financial  statement,  23 
ranch  accounting,  250-263 
savings  bank,  123 
statement, 

coffee  trade,  392 
hotel  accounting,  518-522 
malleable  iron  industry,  307-308 
metal  mining. 

Form,  22s 
public  accountant's  office,  462-464 
ranch  accounting,  268-270 
savings  bank,  128,  133 
Profits, 

division    of,    public    accountant's    office, 

428-430 
on  contracts,  contracting,  342-343 
Promotion  Department, 
advertising  agency,  470 
Property, 

abandoned,  coal  mining,  151-152 

list,  metal  mining,  220 

retired  and  replaced,  coal  mining,  isi- 

IS2 

Proprietorship, 

municipal  accounting,  562,  567,  572,  573, 
S74,  575,  576 
accounts,  535,  540,  S43-S4S 
Public  Accountancy, 
ethics,  426-427 
preparation  for,  425-426 


Public  Accountancy — Continued 
qualifications  for,  425-426 
rules  of  conduct,  427 
Public  Accountant's  Office,  423-464 
audit  program,  438-439 

Form,  440-441 
auditing,  424 

auditor's  certificates,  444-445 
bank  certificate,  443 
branches,  446-447 
branches  of  accounting,  424-425 
clients'  certificates,  442-443 
clients  ledger,  462 

Form,  463 
cost  accounting,  424 
cost  ledger,  454 

Form,  4SS 
educational  work,  432-433 
engagements, 

cost  finding,  454 
Form,  455 

handling  of,  435-437 

list,  435-437 
Form,  436 

summary  of  time  spent  on,  449-45 1 
Form,  452 

terms  of,  447-448 
fees,  447-448 
file,  permanent,  438-439 
financial  statements,  462-464 
general  accounting,  424 
income,  456-462 

analysis  of,  459 

and  expense,  statement,  462 

flat  rate  basis,  457-459 

method  of  booking,  459-462 

per  diem  basis,  456-457 

theories  of,  456-459 
inventory  certificate,  442 
investigations,  424 
journal,  service  and  expense,  459-463 

Form,  461 
liabilities  certificate,  442 
library.  433-434 
location  sheet,  435-437 

Form,  437 
need  for  records  and  system,  423 
office  routine,  431-432 
organization,  428 

chart,  429 
other  records,  462 
overhead,  456 
overtime  work,  434-435 
partners,  428-431 

good-will  shares,  430 

junior,  428-431 


712 


INDEX 


Public  Accountant's  Office — Continued 
partners — Continued 

lion-goodwill  shares,  430 
partnership  agreement,  431 
senior,  428-431 
profit  and  loss  statement,  462-464 
profits,  division  of,  428-430 
reports,  443-446 
filing  of,  445 
office  time,  449-451 

Form,  453 
proficiency,  432 
record  of,  delivered,  44s 

Form,  445 
tax,  424 
time,  448-453 

Form,  451 
time,  for  client,  448-449 

Form,  449 
weekly    summary  and    expense,    449~ 
451 

Form,  450 
research  material,  433 
salary  rate  for  costing,  454-456 
statements,  financial,  462-464 
supervisors,  435-437 
welfare  work,  432-433 
working  papers,  439-443 
Public  Corporations,  S23-S33   (See  also 

"  Municipal  corporations") 
Publicity, 

controller  of,  13 

expense,  department  stores,  419 
Publishers  Ledger, 
advertising  agency,  481 
Form, 482 
Purchases, 

accounts,  ranch  accounting,  252 
coffee  trade,  346-354 
contracting,  328 
controller,  13 

department,  contracting,  321 
department  stores,  418 
hotel  accounting,  soo 
journal,  foreign  exchange, 

Form,  69 
metal  mining,  221 
order,  municipal  accounting,  SS6 
Form,  559 


Qualifications  for  Public  Accountancy, 

425-426 
Quick  Assets  (See  "Assets,  current") 


Quotations, 

malleable  iron  industry,  298-303 
table,  coffee  trade,  366 


Ranch  Accounting,  226-274 
acreage  record,  230-23 1 
adjusting  entries,  250-263 
administration,  269 
agriculture,  226-227,  228 
assets,  264-267 

current,  264-265 

fixed,  265-267 
balance  sheet,  264-268 
board,  255-256 
breaking,  267,  268 
breeding,  25s 

record,  238 
capital,  263 

assets,  240-242 
cash  book,  229    • 
clearing,  267,  268 
closing  entries,  250-263 
constuned  accounts,  250-263 
consumption  record,  237-238 
costs, 

determination  of,  227-228 

farm  produce,  242-243 

labor,  236-237 

live  stock,  244-248 

production,    comparative    analysis    of, 
273 
crop  record,  231-232 

table,  231-232 
departmentization,  228 
depreciation,  256-257,  260,  261 

equipment,  241-242,  265-266 
eggs,  258 
expenses,  250-263 

analysis,  230 

chicken,  258 

garden,  256,  258-259 

E^ain,  255,  261,  262 

hay,  261 

horse,  253-254.  258 

house,  255-256,  258,  259-260 

irrigating,  256,  258-259.  261 

live  stock,  257,  262 

plowing  and  harrowing,  260 

prepaid,  265 

produce,  260-262 

straw,  261,  262 
farming,  226-227 
fertilizer,  253 
fiscal  year,  239-240 


INDEX 


713 


Ranch  Accounting — Continued 
garden  produce,  254-255 
general  books,  228-230 
horse — days  worked,  analysis  of,  274 
improvements,  240-241,  266-267 
income  accounts,  250-263 
interest  on  investment,  257-258 
inventories,  239-250 

accounts,  250-263 

farm  produce,  242-243 

horses,  253 

live  stock,  262 

produce,  262 
journal  entries,  250-263 
labor  cost,  236-237 
labor  record,  234-237 

chronological  record,  234-235 

ledger  record,  235-237 
liabilities,  267 

current,  267 

fixed,  267 
live  stock,  229,  244-248,  265,  268 

accounts,  analysis  of,  271 

classification  of,  246 

inventory,  262 

records,  232-234 
manager's  salary,  256 
operations,  229,  268-269 
organization,  226-239 
poultry  and  egg  record,  238-339 
produce,  229 

accotmts,  analysis  of,  270 

inventory,  262 

unaccounted  for,  252-253 
products,  240,  242-250 
profit  and  loss, 

accounts,  250-263 

statement,  268-270 
purchase  accounts,  252 
range  cattle,  248-250 
records,  226-239 

miscellaneous  information,  239 

statistical,  230-239 

subsidiary,  230 
repairs,  258,  260,  261,  262 
sacks,  255 
sales, 

accounts,  25a 

journal,  230 
seeding,  267,  268 
statements,  financial,  263-274 

comparative  statistics,  271-272 

records,  263-274 
stock  raising,  226-227,  228 
summary  accounts,  250-263 
taxes,  263 


Ranch  Accounting — Continued 

valuation  of  farm  produce,  242-243 

viewpoint  of  accountant,  226 
Rate  File, 

advertising  agency,  473-474 
Rates  and  Statistical  Department, 

advertising  agency,  470 
Raw  Material, 

malleable  iron  industry,  280-281 
Real  Estate, 

account,  coal  mining,  140-141 

depreciation,  39 

insurance  on,  39 

listed   on    financial    statement,    27,    39. 
44 

mortgage  on,  39 

tax  receipt,  municipal  accounting,  556 
Form,  555 
Recapitulation  Statement, 

cofifee  trade,  370-371 
Form,  371 
Receipts, 

and   disbursements,   statement,    savings 
bank, 134-136 

cash,  metal  mining,  222 
Records, 

analysis  of,  requires  organization,  I 

auditor's,  3 

coal  mining,  161-166 

cofi'ee  trade,  350-352 

contracting,  327-328 

hotel  accounting,  492-493 

metal  mining,  220-221 
,      mvmicipal  accounting,  545-553 

public  accountant's  office,  445-446 

ranch  accoimting,  226-239 
Recording  Department, 

advertising  agency,  472 
Rent,  Department  Stores, 

distribution,  413—414 

expense,  420 
Repairs, 

and  maintenance  account,  metal  mining, 
210,  215 

ranch  accounting,  258,  260,  261,  262 
Reports, 

auditor's,  2 
general,  il 

controller's,  11 

metal  mining  annual,  223-225 

pay-roll  section's,  6 

public  accountant's  office,  443-446 

showing  results  of  tabulations  performed, 
5 
Requisitions, 

for  payment, 


714 


INDEX 


Requisitions — Continued 
for  payments — Continued 
contracting,  337-338 
Form,  337 
for  payment  register, 
contracting,  338 
Form, 338 
job  order,  advertising  agency,  474-476 

Forms,  474-475 
tabulation  of,  S 
Research  Material, 

public  accountant's  office,  433-434 
Reserves, 

coal  mining,  146 

for  depletion,  coal  mining,  146 

metal  mining,  223 
listed  on  financial  statement,  41,  45 
Restaurant, 

cashier's  report,  49s 

Form,  49 S 
cost  compilation,  512-513 
Retail  Trade, 
coffee,  345,  386-395 

system  of  pricing  inventories,  department 
stores,  403-407 
Revenue  (See  "Income") 
Room  Count  Book, 

hotel  accounting,  493-494 
Form,  494 
Royalty. 

coal  mining,  159-160 
metal  mining,  223 
Rules  of  Conduct, 
public  accountancy,  427 


Sales, 

accounts,  ranch  accounting,  252 

classification  of,  by  aVialysis  section,  5 

coal,  coal  mining,  152 

coffee  trade,  357-360 

controller  of,  13 

department  stores,  398-401 

journal, 

coal  mining,  161-163 

Form,  162-163  ^ 

foreign  exchange. 
Form,  69 

hotel  accounting,  502-505 

ranch  accounting,  230 
malleable  iron  industry,  307 
ratio  of,  to  receivables,  34 
records, 

advertising  agency,  472-473 

coffee  trade,  357-360 


Sales — Continued 
records — Continued 

department  stores,  398-400 
slips,  department  stores,  398-400 
subject  to  alteration  of  goods,  department 

stores,  400 
Savings  Bank,  101-136 

accounting,      distinctive      features      of, 

109 
accounts,  general  ledger,  1 21-123 

balance  sheet,  1 21-123 

profit  and  loss,  123 
amortization  of  bonds,  117-118 

recording,  118 

schedule,  118 

schedules  book,  1 16-1 17 
audit,  125-126 

aim  of,  126 

kinds,  126 
balance  sheet,  127,  131 

supporting  schedules,  132 
bond  and  mortgage  record,  114-116 

files  kept,  115 

insurance  policies,  11 S 

interest  payments,  115-116 
cash  records,  11 8-1 21 

general  cash  book,  1 20-1 21 

monthly  report  cash  book,  ii9-i2« 

petty  cash  book,  119 
departments, 

general  and  executive,  113-114 

new  accounts,  no 

paying,  iio-iii 

receiving,  111-113 
deposit,  111-113 

route  of. 
Form, 112 
dividend,  124 

calculating  and  recording,  124-125 
draft,  iio-iii 

route  of,  112 
guaranty  fund,  124 
investments,  legal,  io8 
ledger, 

depositors,  110-113 

general,  121 
loan,  mortgage,  114 
mutual,  loi 

certificate  of  organization,  104-105 

characteristics,  101-102 

charter,  los 

management,  106-107 

organization,  103-105 

trustee,  103-105,  106 
problem,  128-130 

solution,  131-136 


INDEX 


715 


Savings  Bank — Continued 
statement, 

balance  sheet,  127,  131,  132 
profit  and  loss,  128,  133 
receipts  and  disbursements,  134-136 
stock,  101-103 

characteristics,  102-103 
stock  and  bond  ledger,  117 
stock  and  bond  record,  116-117 
stock-in-trade,  108 
valuation  of  securities,  127 
withdrawal,  iio-iii 
Securities, 

issued,    held    in    treasury,    account,    coal 
mining,  142 
Seeding, 

ranch  accounting,  267,  268 
Selling  Expenses, 
coal  mining,  160 
department  stores,  418 
Senior  Partners, 

public  accountant's  office,  428-431 
Service  and  Expense  Journal, 
public  accoimtant's  office,  459-462 
Form.  461 
Shipments, 

ore,  metal  mining,  220-221 
Signature, 

on  financial  statement,  21 
Sinking  Fund, 

municipal  accounting,  574 

statement  of  financial  condition,  574 
Smelting, 

ores,  metal  mining,  204-206 
Sold  Sheet, 

coflee  trade,  368-370 
Form,  369 
Source  of  Funds, 

municipal  corporations,  529 
Sources  of  Charges  to  Accounts, 

malleable  iron  industry,  288-289 
Special  Assessment  Fund, 
municipal  accounting,  566-571 
journal  entries,  568-571 
statement  of  financial  condition,  566- 
567 
Specie,  Foreign, 

foreign  exchange,  60-61 
Speculation, 

coffee  trade,  367-368 
Spot, 

contracts  foreign  exchange,  56 
purchases,  coflee  trade,  3S2-3S4 
purchases   register,    coffee    trade,    352- 
354 
Form,  355 


Statements    (See    also    "Profit   and    loss 
statements") 
balance  sheet, 
metal  mining. 

Form,  224-225 
savings  bank,  127,  131 
savings    bank,    supporting    schedules, 
132 
budget,  S8i 
cost, 

coal  mining,  197-200 
municipal  accounting,  582-584 
production,  coal  mining,  201 
financial    (See    also    subheading    below, 

"Statements,  financial  [forms  for]"), 

18-48 
accounts  payable,  listed  on,  23,  26,  37, 

44 
accounts  receivable  listed  on,  23,  43 
accrued  items,  38,  44 
amounts  due  from  affiliated  and  sub- 
sidiary companies,  38,  44 
analysis  of,  for  credit,  30,  42 
analysis  of,  summarized,  45-48 
assets,  analysis  of,  39 
assets  listed  on,  19 
assets  on  comparison  sheet,  39 
assets  used  as  collateral,  listed  on,  36 
balance  sheet  on,  17 
bonded  debt  listed  on,  27 
capital  account  on,  40 
capital  stock  listed  on,  21 
cash  items  on,  23,  43 

Form,  22 
coffee  trade,  392-395 
commitments  listed  on,  21 
comparison  sheets,  27-30 

Form,  28-29.  31-32 
consolidated,  575 
contingent     liabilities    listed    on,    21- 

23 
department  stores,  416-422 
depreciation  listed  on,  39 
fixtures  listed  on,  39,  44 
hotel  accounting,  518-522 
insurance  schedule  on,  23 
inventory  listed  on,  25,  44 
investments  listed  on,  25 
liabilities  listed  on,  19,  44 
loans  listed  on,  44 
machinery  listed  on,  39,  44 
malleable  iron  industry,  305-308 
mortgage  listed  on,  39 
municipal  accounting,  560-585 
notes  payable  listed  on,  23,  37,  44 

Form,  22 


7i6 


INDEX 


Statements — Continued 
financial — Continued 

notes  receivable  listed  on,  23,  43 

Form,  24 
profit  and  loss  account  on,  23 
public  accountant's  office,  462-464 
ranch  accounting,  263-274 
ratios  on,  33-3S.  42 
real  estate  listed  on,  27,  39,  44 
reserves  listed  on,  41,  44 
savings  banks,  127-136 
signature  on,  21 
surplus  account  on,  23 
trade-marks,    patents,    and    good-will 
listed  on,  40,  44 
financial  (forms  for), 

bank's  comparison  sheet,  31 

bank's  comparison  sheet  of  borrower's 

assets  and  liabilities,  28 
bank's  sheet  for  comparison  of  income 

and  capital  account,  29 
borrower's   statement   sheet    of   assets 
and     liabilities    with     comparisons, 
32 
submitted  to  bank  by  borrower,  20,  22, 
24,  26 
foreign  exchange,  S8 
graphic,  municipal  accounting,  584-585 

Forms,  584,  585 
income,  coal  mining,  195-196 
preparation    of,    controlled    by    general 

office  accounting  section,  4 
to  customers,  prepared  by  accounts  re- 
ceivable section,  7 
Statistical  Records, 

malleable  iron  industry,  308-315 
metal  mining,  220-221 
ranch  accounting,  230-239,  263-274 
Stock  (See  "Live  Stock,"  "Stores") 
Stores,  (See  also  "Inventory") 

accounting  for,  malleable  iron  industry, 

302-303 
records, 

coffee  trade,  360-364 

Form, 360-361 
department  stores,  409 
ledger,   malleable  iron  industry,   302- 
303 

Form,  309 
municipal  accounting,  553 
system, 

contracting,  328-329 
metal  mining,  217-219 
malleable  iron  industry,  280-281 
Structures, 

accounts,  coal  mining,  148,  149 


Subcontractor's  Ledger, 
contracting,  335-337 
Form,  336 
Subsidiary  Companies, 

amounts  due,  listed   on   financial   state- 
ment, 38,  44 
Summary  Accounts, 

ranch  accounting,  250-263 
Summaries    (Forms),    (See    also    "State- 
ments") 
accountant's, 

time  and  expense  report,  weekly,  450 
time  report,  detailed,  451 
time  report,  office,  453 
time  spent  on  engagement,  452 
coffee  trade, 

bought  sheet,  369 
sold  sheet,  369 
stock  report,  weekly,  362 
malleable  iron  industry, 

cost  summary,  monthly,  293 

losses  in  manufacture,  313 

metals  melted,  daily,  311 

pig  iron  contracts  vs.  unfilled  orders, 

monthly  summary  of,  312 
unfilled  orders,  313 
Superintendent's        Individual        Car 
Record, 
malleable  iron  industry,  308-310 
Form,  309 
Superintendent's  Melting  Order, 
malleable  iron  industry,  3 10-3 11 
Form,  310 
Supervisors, 

public  accountant's  office,  435-437 
Supplies, 

and  materials,  distribution,  metal  mining, 
217-219, 
Form,  219 
malleable  iron  industry,  280-281 
Surplus, 

account,  listed  on  financial  statement,  33 
analysis,  municipal  accounting,  580 
fimd, 

from  donated  stock,  metal  mining,  223 
savings  bank,  124 


Tabulations, 

department  for,  5 
Tax, 
^    reports,  public  accountant's  office,  424    < 

roll,  municipal  accounting,  S50 
Form,  546-547 


INDEX 


717 


Taxes, 

ranch  accounting,  263 
Tenant, 
buildings  and  camp,   coal  mining,    141, 
150-151 
Time, 

bills,  advances  on,  foreign  exchange,  63- 

64 
keeping,  contracting,  329-330 
limits,  contracting,  321 
reports,  public  accountant's  ofi&ce,  448- 
453 
for  client,  448-449 
Form,  449 
Tipple, 

coal  mining,  account,  156 
Tonnage  Costs, 

malleable  iron  industry,  293-29S 
monthly  cost  summaries,  293,  294 
Trade- Marks, 

listed  on  financial  statement,  40,  44 
Trader, 

foreign  exchange,  51-52 

trader's  position,  foreign  exchange,  56 
daily  transactions,  56-57 
Trading, 

on  the  exchange,  coffee  trade,  364-386 
Transfer  of  Materials, 

contracting,  329 
Transportation  Account, 

metal  mining,  215 
Travelers'  Checks, 

foreign  exchange,  97-99 
Travelers'  Letters  of  Credit, 

foreign  exchange,  97-99 
Trial  Balances, 

coal  mining,  problem,  181-182 
solution  to  problem,  192-194 
Trimming  and  Inspecting  Department, 

malleable  iron  industry,  291 
Trust  Fund, 

municipal  accounting,  574-575 

statement  of  financial  condition,  S74~ 
575 
Trustee, 

savings  bank,  mutual,  103-105 
liabilities,  105-106 
Turnover, 

determining,  34 
department  stores,  4 10-4 11 


u 


Uniform  Accounting, 

malleable  iron  industry.  285-287 
municipal  corporations,  528,  534 


Utility, 

fund,  municipal  accounting,  571-572 

statement  of  financial  condition,  572 
ledger,  municipal  accounting,  5S0 
Form,  548-549 


Valuation, 

coal  mines,  for  depletion,  167-169 
coal  used  in  production,  178 
department  store  inventory,  403—409 
equipment,  ranch  accounting,  241-242 
farm    produce,    ranch    accounting,    242- 

243 
green  coffee  inventory,  363 
hotel  stores  inventory,  508—510 
improvements,    ranch    accounting,    240- 

241 
live  stock,  ranch  accounting,  244-248 
malleable  iron  inventory,  303-304 
malleable   iron   construction    work,  304- 

305 
ore  in  transit,  metal  mining,  212-213 
ore  mined,  metal  mining,  212-213 
range  cattle,  ranch  accounting,  248-250 
securities,  savings  bank,  127 
Verification  of  Earnings. 
hotel  accounting,  501-502 
Voucher,  Register,  7 

Form,  8 
contracting,  332-335 

Form,  332-333 
hotel  accounting,  508 
metal  mining,  221 
municipal  accounting,  553 

Form,  552 
Vouchers, 

control  of,  by  accounts  payable  section,  6 
pay-in,  556 

Forms,  553-554 
preparation  of, 

by  cost  accounting  section,  5 

controlled  by  general  office  accounting 
section,  4 

w 

Waiters'  Checks, 
hotel  accounting,  495 
register, 

hotel  accounting,  49s 
Weekly  Summary  and  Expense  Report, 
public  accountant's  office,  449-451 
Form,  450 


718 


INDEX 


Weighing  Certificate, 

cofFee  trade,  384 
Welfare    Work,    Public    Accountants 
Office,  432-433 


Withdrawal  OF  Deposits, 

savings  bank,  iio-iii 
VoRKiNG  Papers, 
public  accountant's  office,  439-443 


IT^JJVFRSITV  r>^ 


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